•  '■  j'HvMV 

. 

/  •  H  O  ♦ 


INDEX 


c  r 

CO-INSURANCE 

By  W.  N.  Bament  - 

THE  FIRE  INSURANCE  POLICY  AS  A  CONTRACT 

By  W.  N.  Bament  ----- 

WHAT  IS  A  FIRE  LOSS? 

DIRECT  AND  CONSEQUENTIAL  LOSS 

By  W.  N.  Bament  ----- 

IS  A  POLICY  DIVISIBLE? 

By  W.  N.  Bament  ----- 

y  — •  .. 

FORMS— 

FROM  THE  COMPANY’S  STANDPOINT 
By  W.  N.  Bament  -  -  - 

USE  AND  OCCUPANCY  INSURANCE 

By  W.  N.  Bament  -  -  -  -  -  - 

THE  INTEREST  OF  A  MORTGAGEE 

UNDER  A  POLICY  OF  FIRE  INSURANCE 

By  W.  N.  Bament  ----- 

FIRE  LOSS  SETTLEMENTS 

FIRST  LECTURE 

By  J.  T.  Dargan,  Jr.  - 

FIRE  LOSS  SETTLEMENTS 

SECOND  LECTURE 

V  I  ^  ... 

By  J.  T:  Dargan,  Jr.  - 

FIRE  LOSS  SETTLEMENTS 

THIRD  LECTURE  ’  ‘  . 

By  J.  T.  Dargan,  Jr.  -  9- 

APPORTIONMENT  OF  LOSSES  *  * 

UNDER  NONCONCURRENT  POLICIES 

By  W.  N.  Bament  ----- 

WRITS  OF  ATTACHMENT  AND  OTHER  LIENS 

By  W.  N.  Bament  ----- 


CO -INSURANCE 

AN  ADDRESS 

DELIVERED  BEFORE  THE  ONE  HUNDRED  AND 
FIFTY-FOURTH  STATED  MEETING 

OF 

The  Insurance  Society 

of  New  York 


March  30,  1920 


BY 

W.  N.  BAMENT 

General  Adjuster 


£ia) 


THE  HOME  INSURANCE  COMPANY 

NEW  YORK 


$£8./ 

bfco^x  vu 

The  Co-insurance  Clause 


Of  the  more  important  clauses  in  current  use,  the  one 
most  frequently  used,  most  severely  criticized,  most  mis¬ 
understood,  most  legislated  against,  and  withal  the  most 
reasonable  and  most  equitable,  is  that  which  in  general  terms 
is  known  as  the  “co-insurance  clause.” 

Insurance  is  one  of  the  great  necessities  of  our  business, 
social  and  economic  life,  and  the  expense  of  maintaining  it 
should  be  distributed  among  the  property  owners  of  the 
country  as  equitably  as  it  is  humanly  possible  so  to  do. 

Losses  and  expenses  are  paid  out  of  premiums  col¬ 
lected.  When  a  loss  is  total  the  penalty  for  underinsurance 
falls  where  it  properly  belongs,  on  the  insured  who  has 
elected  to  save  premium  and  assume  a  portion  of  the  risk 
himself,  and  the  same  penalty  for  underinsurance  should  by 
contract  be  made  to  apply  in  case  of  partial  loss  as  applies 
automatically  in  case  of  total  loss. 

If  all  losses  were  total,  liberality  on  the  part  of  the 
insured  in  the  payment  of  premium  would  bring  its  own 
reward,  and  parsimony  would  bring  its  own  penalty ;  but 
the  records  of  the  leading  companies  show  that  of  all  the 
losses  sustained,  about  65% — numerically — are  less  than  $100; 
about  30%  are  between  $100  and  total;  and  about  5%  are 
total.  The  natural  inclination,  therefore,  on  the  part  of  the 
public,  particularly  on  the  less  hazardous  risks,  is  to  under¬ 
insure  and  take  the  chance  of  not  having  a  total  loss ;  and  this 
will  generally  be  done  except  under  special  conditions,  or  when 
reasonably  full  insurance  must  be  carried  to  sustain  credit 
or  as  collateral  security  for  loans.  There  were  several  strik¬ 
ing  illustrations  of  this  in  the  San  Francisco  conflagration, 
where  the  amount  of  insurance  carried  on  so-called  fireproof 
buildings  was  less  than  10%  of  their  value,  and  the  insured 
in  such  instances,  of  course,  paid  a  heavy  penalty  for 
their  neglect  to  carry  adequate  insurance. 

Co-insurance  operates  only  in  case  of  partial  loss,  where 
both  the  insurance  carried  and  the  loss  sustained  are  less 
than  the  prescribed  percentage  named  in  the  clause,  and  has 
the  effect  of  preventing  one  who  has  insured  for  a  small 
percentage  of  value  and  paid  a  correspondingly  small  pre¬ 
mium  from  collecting  as  much  in  the  event  of  loss  as  one 
who  has  insured  for  a  large  percentage  of  value  and  paid 
a  correspondingly  large  premium.  We  have  high  authority 
for  the  principle, 

1 


A 


%  -f 


“He  which  soweth  sparingly  shall  reap  also 
sparingly,  and  he  which  soweth  bountifully  shall 
reap  also  bountifully.” 

and  it  should  be  applied  to  contracts  of  insurance.  Rating 
systems  may  come,  and  rating  systems  may  go ;  but,  unless 
the  principle  of  co-insurance  be  recognized  and  universally 
applied,  there  can  be  no  equitable  division  of  the  insurance 
burden,  and  the  existing  inequalities  will  go  on  forever.  The 
principle  is  so  well  established  in  some  countries  that  the 
general  foreign  form  of  policy  issued  by  the  London  offices 
for  use  therein  contains  the  full  co-insurance  clause  in  the 
printed  conditions. 

The  necessity  for  co-insurance  as  an  equalizer  of  rates  was 
quite  forcibly  illustrated  by  a  prominent  underwriter  in  an  ad¬ 
dress  delivered  several  years  ago,  in  the  following  example 
involving  two  buildings  of  superior  construction : 

“A’S”  BUILDING  “B’S”  BUILDING 


Value  $100,000  Value  $100,000 

Insurance  80,000  Insurance  10,000 

Rate  1%  Rate  1% 

Premium  received —  Premium  received — 

one  year,  800  one  year,  100 

No  Co-insurance  Clause  No  Co-insurance  Clause 

Loss  800  Loss  800 

Loss  Collectible  800  Loss  Collectible  800 


“B”  pays  only  one-eighth  as  much  premium  as  “A,” 
yet  both  collect  the  same  amount  of  loss,  and  in  the  absence 
of  co-insurance  conditions  both  would  collect  the  same  amount 
in  all  instances  where  the  loss  is  $10,000  or  less.  Of  course, 
if  the  loss  should  exceed  $10,000,  “A”  would  reap  his  reward, 
and  “B”  would  pay  his  penalty.  This  situation  clearly  calls  either 
for  a  difference  in  rate  in  favor  of  “A”  or  for  a  difference  in 
loss  collection  as  against  “B,”  and  the  latter  can  be  regulated 
only  through  the  medium  of  a  co-insurance  condition  in  the 
policy. 

At  this  point  it  may  not  be  amiss  incidentally  to  inquire 
why  the  owner  of  a  building  which  is  heavily  encumbered, 
whose  policies  are  payable  to  a  mortgagee  (particularly  a 
junior  encumbrancer)  under  a  mortgagee  clause,  and  where 
subrogation  may  be  of  little  or  no  value,  should  have  the 
benefit  of  the  same  rate  as  the  owner  of  another  building  of 
similar  construction  with  similar  occupancy,  but  unencum¬ 
bered. 

In  some  states  rates  are  made  with  and  without  co- 
insurance  conditions,  quite  a  material  reduction  in  the  basis 
rate  being  allowed  for  the  insertion  of  the  80%  clause  in  the 
policy,  and  a  further  reduction  for  the  use  of  the  90%  and 
100%  clauses.  This,  however,  does  not  go  far  enough,  and 
any  variation  in  rate  should  be  graded  according  to  the  co- 


2 


insurance  percentage  named  in  the  clause,  and  this  gradation 
should  not  be  restricted,  as  it  is,  to  80%,  90%  or  100%, 
if  the  principle  of  equalization  is  to  be  maintained. 

Various  clauses  designed  to  give  practical  effect  to  the 
co-insurance  principle  have  been  in  use  in  this  country  for 
nearly  forty  years  in  connection  with  fire  and  other  contracts 
of  insurance.  Some  of  these  are  well  adapted  to  the  purpose 
intended,  while  others  fail  to  accomplish  said  purpose  under 
certain  conditions ;  but,  fortunately,  incidents  of  this  nature 
are  not  of  frequent  occurrence. 

There  are,  generally  speaking,  four  forms,  which  differ 
quite  materially  in  phraseology,  and  sometimes  differ  in  prac¬ 
tical  application.  These  four  clauses  are:  (1)  the  old  co- 
insurance  clause;  (2)  the  percentage  co-insurance  clause; 
(3)  the  average  clause;  (4)  the  reduced  rate  contribution 
clause. 

Until  recently,  underwriters  were  complacently  using 
some  of  these  titles  indiscriminately  in  certain  portions  of  the 
country,  under  the  assumption  that  the  clauses,  although 
differently  phrased,  were  in  effect  the  same,  but  they  were 
subjected  to  quite  a  rude  awakening  by  a  decision  which  was 
handed  down  about  a  year  ago  by  the  Tennessee  Court  of 
Civic  Appeals.  The  law  in  Tennessee  permits  the  use  of 
the  three-fourths  value  clause  and  the  co-insurance  clause, 
but  permits  no  other  restrictive  provisions.  The  form  in  use 
bore  the  inscription  “Co-insurance  Clause,”  but  the  context 
was  the  phraseology  of  the  reduced  rate  contribution  clause, 
and  although  the  result  was  the  same  under  the  operation  of 
either,  the  court  held  that  the  form  used  was  not  the  co- 
insurance  clause,  hence  it  was  void  and  consequently  inop¬ 
erative.  Thompson  vs.  Concordia  Fire  Ins.  Co.  (Tenn.  1919) 
215  S.W.  Rep.  932,  55  Ins.  Law  Journal  122. 

The  law  of  Georgia  provides  that  all  insurance  companies 
shall  pay  the  full  amount  of  loss  sustained  up  to  the  amount 
of  insurance  expressed  in  the  policy,  and  that  all  stipulations 
in  such  policies  to  the  contrary  shall  be  null  and  void.  The  law 
further  provides  that  when  the  insured  has  several  policies 
on  the  same  property,  his  recovery  from  any  company  will 
be  pro  rata  as  to  the  amount  thereof. 

About  twenty  years  ago,  the  Supreipe  Court  of  Georgia 
was  called  upon  to  decide  whether  under  the  law  referred 
to  the  old  co-insurance  clause  then  in  use,  which  provided 

“that  the  assured  shall  at  all  times  maintain  a  total 
insurance  upon  the  property  insured  by  this  policy 
of  not  less  than  75%  of  the  actual  cash  value  thereof 
.  .  .  .  and  that  failing  to  do  so,  the  assured  shall 

become  a  co-insurer  to  the  extent  of  the  deficiency,” 

was  valid  and  enforceable,  and  it  decided  that  the  clause  was 
not  violative  of  the  law.  Pekor  vs.  Fireman’s  Fund  Ins.  Co. 
(1898)  (106  Ga.  page  1). 


3 


The  court  evidently  construed  the  clause  as  a  binding 
agreement  on  the  part  of  the  insured  to  secure  insurance  up  to 
a  certain  percentage  of  value,  and  virtually  held  that  if  the 
insured  himself  desired  to  take  the  place  of  another  insurance 
company  he  was  at  liberty  to  do  so  as  one  way  of  fulfilling 
his  agreement. 

The  Georgia  courts,  however,  have  not  passed  upon  the 
validity  of  the  reduced  rate  contribution  clause  in  connection 
with  the  statutory  law  above  referred  to ;  but  it  is  fair  to 
assume  that  they  will  view  the  matter  in  the  same  light  as  the 
Tennessee  court  (supra),  and  hold  that  it  is  not  a  co-insurance 
clause,  even  though  it  generally  produces  the  same  result ; 
that  it  contains  no  provision  whatever  requiring  the  insured 
to  carry  or  procure  a  stated  amount  of  insurance,  and  in  event 
of  failure,  to  become  a  co-insurer,  but  that  it  is  simply  a  clause 
placing  a  limitation  upon  the  insurer’s  liability,  which  is 
expressly  prohibited  by  statute.  The  fact  that  the  insurers 
have  labeled  it  “75%  Co-insurance  Clause”  does  not  make 
it  such. 

It  is,  therefore,  not  at  all  surprising  that  the  question  is 
frequently  asked  as  to  the  difference  between  the  various 
forms  of  so-called  co-insurance  clauses,  and  these  will  be 
considered  in  the  order  in  which,  chronologically,  they  came 
into  use. 

Probably  in  ninety-nine  cases  out  of  one  hundred  there 
is  no  difference*  between  these  clauses  in  the  results  obtained 
by  their  application,  but  cases  occasionally  arise  where  ac¬ 
cording  to  the  generally  accepted  interpretation  the  difference 
will  be  quite  pronounced.  This  difference,  which  will  be 
hereinafter  considered,  appears  in  connecton  with  the  old 
co-insurance  clause  and  the  percentage  co-insurance  clause, 
and  only  in  cases  where  the  policies  are  nonconcurrent. 

The  first  of  the  four  forms  is  the  old  co-insurance  clause 
which  for  many  years  was  the  only  one  used  in  the  West, 
and  which  is  used  there  still,  to  some  extent,  and  now  quite 
generally  in  the  South.  Its  reintroduction  in  the  South  was 
probably  due  to  the  Tennessee  decision,  to  which  reference 
has  been  made  (supra).  This  clause  provides  that  the  insured 
shall  maintain  insurance  on  the  property  described  in  the 
policy  to  the  extent  of  at  least  a  stated  percentage  (usually 
80%)  of  the  actual  cash  value  thereof,  and  failing  so  to  do, 
shall  to  the  extent  of  such  deficit  bear  his,  her  or  their  pro¬ 
portion  of  any  loss.  It  does  not  say  that  he  shall  maintain 
insurance  on  all  of  the  property,  and  the  prevailing  opinion 
is  that  the  co-insurance  clause  will  be  complied  with  if  he 
carries  the  stipulated  percentage  of  insurance  either  on  all 
or  on  any  part  of  the  property  described,  notwithstanding 
the  fact  that  a  portion  of  said  insurance  may  be  of  no  assist¬ 
ance  whatever  to  the  blanket,  or  more  general  policy,  as  a 
contributing  factor. 


© 


4 


'The  following  example  will  serve  as  an  illustration  : 

Co.  “A”  covers  $10,000  on  Bldgs.  Nos.  1,  2  and  3,  100%  Clause. 
Co.  “B”  covers  $10,000  on  Building  No.  2,  100%  Clause. 

Co.  “C”  covers  $5,000  on  Building  No.  3,  100%  Clause. 

Sound  Value  of  Building  No.  1,  $10,000 

Sound  Value  of  Building  No.  2,  10,000 

Sound  Value  of  Building  No.  3,  10,000 

Loss  on  Building  No.  1,  $10,000. 

LTnder  the  application  of  the  100%  average  or  reduced 
rate  contribution  clause,  the  liability  of  Corppany  “A”  would 
be  10,000/30,000  of  $10,000,  or  $3,333.33,  but  under  the  100% 
co-insurance  clause  its  liability  would  be  10,000/15,000  of 
$10,000,  or  $6,666.67,  and  the  insured  would  be  a  co-insurer 
for  5,000/15,000  of  $10,000,  or  $3,333.33.  Inasmuch  as  the 
$10,000  policy  in  Company  “B”  and  the  $5,000  policy  in 
Company  “C”  do  not  cover  on  the  building  where  the  loss 
occurred,  they,  of  course,  can  not  be  brought  in  for  contri¬ 
bution  toward  paying  the  loss,  but  for  the  purpose  of  con¬ 
structively  meeting,  or  assisting  in  meeting,  the  requirements 
of  the  co-insurance  clause  it  is  contended  that  it  is  “insurance 
on  the  within-described  property.” 

It  has  even  been  suggested  that  in  the  example  above 
cited  the  insured  would  be  a  -co-insurer  only  to  the  extent 
of  5,000/30,000  of  $10,000,  or  $1,666.66,  and  that  Company 
“A”  would  pay  the  balance  of  the  loss,  $8,333.33.  To  produce 
this  result,  however,  Company  “A’s”  policy  would  have  to 
be  transformed  from  one  for  $10,000  into  one  for  $25,000, 
and  this  would  be  beyond  the  realm  of  either  rhyme  or 
reason.  If  it  be  conceded  that  the  basis  of  the  insured’s 
contribution  as  a  co-insurer  can  be  restricted  to  $5,000,  he 
must  co-insure  with  something,  and  inasmuch  as  the  only 
thing  for  him  to  co-insure  with  is  the  $10,000  policy  in 
Company  “A,”  it  follows  that  his  contribution  to  the  loss 
as  a  co-insurer  would  be,  as  above  stated,  5.000/15,000  of 
$10,000,  or  $3,333.33. 

Either  of  the  above  constructions  is,  of  course,  entirely 
at  variance  with  the  intention  of  the  authors  of  the  clause,  and 
tends  to  frustrate  its  purpose,  but  it  appears  to  be  the  opinion 
of  lawyers  and  laymen  that  the  first  of  these  would  be  upheld 
by  the  courts,  and  that  the  remedy,  if  any  is  to  be  had,  must 
be  sought  in  an  amendment  of  the  clause.  A  move  in  this 
direction  has  been  made  in  Canada,  where  it  has  been  amended 
by  making  it  read : 

“The  assured  shall  maintain  insurance  on  the 
within-described  property  concurrent  in  form  with 
this  policy.” 

This  ought  to  correct  the  defect  in  the  old  form,  and 
probably  will  have  that  effect  in  Canada,  but  the  courts  of 
this  country  have  given  such  a  narrow  interpretation  to  the 


5 


word  “concurrent”  that  it  will  not  do  to  place  too  much 
reliance  upon  this  amendment.  It  is  suggested  that  the  form 
might  be  improved  by  inserting  the  word  “contributing” 
before  the  word  “insurance,”  thus  making  it  read: 

“The  assured  shall  maintain  contributing  in¬ 
surance  concurrent  in  form  with  this  policy.” 

Although  insurance  companies  are  apparently  content  to 
accept  the  first  of  the  above  constructions  of  this  form  of 
co-insurance  clause  in  the  comparatively  few  cases  that  arise, 
yet  it  certainly  requires  no  prophet  to  predict  that  if  in  a  given 
case  the  interest  of  the  insured  should  be  adversely  affected 
by  said  construction,  the  courts  would  experience  no  great 
difficulty  in  holding  that  although  plausible  and  certainly 
not  out  of  harmony  with  the  phraseology  of  the  clause,  this 
construction  could  not  possibly  have  been  intended  by  the 
framers  thereof.  If,  for  instance,  in  the  example  above  cited, 
the  capital  stock  of  the  company  issuing  the  blanket  policy 
has  become  impaired,  and  the  insured  had  excess  insurance 
broad  enough  to  cover  the  liability  which  accrued  to  him  by 
reason  of  the  operation  of  the  co-insurance  clause  in  the 
blanket  policy,  it  is  self-evident  that  the  smaller  the  amount 
due  from  the  insolvent  blanket  insurer,  the  greater  would 
be  the  amount  collectible  from  the  solvent  excess  insurer ; 
hence,  it  would  be  against  the  interest  of  the  insured  to  have 
the  above  construction  placed  upon  the  co-insurance  clause, 
and  its  most  ardent  advocates  would  not  seriously  expect  to 
have  it  upheld  in  such  circumstances.  The  clause  is  defective, 
and  should  be  amended  so  as  to  give  the  blanket  policy  the 
benefit  of  concurrent  contribution  from  the  insured,  unaffec¬ 
ted  by  the  existence  of  non-contributing  specific  or  less  gen¬ 
eral  insurance.  The  question  of  amendment  has,  however, 
been  duly  considered  by  underwriters  in  the  states  having 
restrictive  statutes,  and  inasmuch  as  the  validity  of  the  clause 
as  it  reads  has  been  sustained  by  the  courts  of  said  states,  it 
has  been  deemed  advisable  to  make  a  change  in  the  wording 
in  that  territory. 

The  second  clause  is  known  as  the  percentage  co-insur¬ 
ance  clause,  and  provides  that : 

“If,  at  the  time  of  fire,  the  whole  amount  of 
insurance  on  the  property  covered  by  this  policy 
shall  be  less  than  — %  of  the  actual  cash  value 
thereof,  this  company  shall,  in  case  of  loss  or  dam¬ 
age,  be  liable  for  only  such  portion  of  such  loss  or 
damage  as  the  amount  insured  by  this  policy  shall 
bear  to  the  said  — %  of  the  actual  cash  value  of 
such  property.” 

The  authors  of  this  clause  doubtless  supposed  that  it  was 
an  improvement  upon,  and  that  it  would  correct  the  defect 


6 


in,  the  co-insurance  clause;  but  if  so  they  were  mistaken, 
for  as  a  matter  of  fact  it  is  not  only  worse  than  the  old 
clause,  but  is  positively  grotesque  in  its  discriminating  effects 
under  certain  conditions.  It  will  be  noted  that  the  limitation 
of  liability  provided  for  is  contingent  upon  the  whole  amount 
of  insurance  on  the  property  covered  by  the  policy  being 
less  than  — %  of  the  actual  cash  value  thereof.  As  in  the 
case  of  the  old  co-insurance  clause,  in  all  but  a  comparatively 
few  instances  the  result  will  be  the  same  as  under  the  more 
modern  clauses,  to  wit :  the  average  clause,  or  the  reduced 
rate  contribution  clause,  and  the  defect  appears  only  where 
the  insurance  is  nonconcurrent. 

In  the  preparation  of  a  form  it  is,  of  course,  impossible 
to  anticipate  all  the  conditions  that  are  liable  to  arise,  and  it 
cannot  be  doubted  that  the  framers  of  this  clause  intended, 
to  secure  to  the  insurers  in  all  cases  the  same  benefit  that 
would  accrue  to  them  if  the  insured  carried  full  contributing; 
insurance  equal  to  the  stated  percentage  of  the  value  of  the 
property.  The  first  sentence  of  the  clause,  however,  is  ex¬ 
ceedingly  unfortunate,  for  as  it  is  generally  construed,  the 
entire  insurance  covering  any  portion  of  the  property  will  be 
included  for  the  purpose  of  determining  whether  the  co-insur¬ 
ance  condition  is  properly  applicable,  although  said  insurance 
may  not  contribute  anything  whatever  toward  the  payment 
of  the  loss.  In  this  respect  it  is  subject  to  the  same  criticism 
as  the  old  co-insurance  clause.  When  the  whole  insurance, 
including  the  blanket  and  specific,  the  contributing  and  non¬ 
contributing,  equals  or  exceeds  the  percentage  of  value  speci¬ 
fied  in  the  clause,  both  operate  exactly  alike  to  relieve  the 
insured  from  contribution  as  co-insurer ;  but  if  the  whole 
insurance  be  less  than  the  percentage  specified,  the  percentage 
co-insurance  clause  is  much  less  advantageous  to  the  insured 
than  the  old  co-insurance  clause,  as  will  be  readily  seen  from 
an  analysis  of  the  example  given  above  in  connection  with  the 
latter  clause  (supra).  In  said  example,  by  the  application  of  the 
old  co-insurance  clause,  the  insured  is  a  co-insurer  for  only 
5,000/15,000  of  $10,000,  and  loses  only  $3,333.33;  but  by  the 
application  of  the  percentage  co-insurance  clause  the  insured 
loses  $6,666.67,  or  the  difference  between  $10,000  and  the 
$3,333.33  collectible  from  Company  “A.” 

The  fault  with  the  percentage  co-insurance  clause  lies 
in  the  opening  sentence,  “If  at  the  time  of  the  fire  the 

whole  amount  of  insurance . shall  be  less  than 

— %  of  the  cash  value.”  This  makes  the  application  of  the 
clause  (the  latter  portion  of  which  is  virtually  the  same  as 
the  average  clause  or  the  reduced  rate  contribution  clause) 
absolutely  contingent  upon  the  stated  percentage  of  insurance 
being  carried,  and  in  case  of  nonconcurrence,  if  the  sound 
value  be  increased  to  the  extent  of  only  $1.00,  it  may  make 
a  difference  of  many  thousands  of  dollars  to  the  insured. 
The  following  example,  suggested  by  the  late  W.  J.  Nichols, 


7 


general  adjuster  of  the  North  British  and  Mercantile  Ins.  Co. 
will  illustrate  the  point : 


Sound  Value  of  Building  “A,” 
Sound  Value  of  Building  “B,” 
Specific  Insurance  on  Building  “A,” 
Blanket  Insurance  on  Buildings  “A” 
and  “B,” 

80%  of  Value  of  Buildings  “A”  and 


$200,000 

200,000 

120,000  80%  Clause 
200,000  80%  Clause 


“B  ”  320,000 

Loss  on  Building  “B,”  200,000 

Blanket  Insurance  pays  200,000 

Although  the  $120,000  specific  insurance  on  Building  “A” 
is  not  involved  in  the  loss,  yet  it  covers  on  a  portion  of  the 
property  described  in  the  blanket  policy,  and  is  a  part  of 
“the  whole  insurance,”  therefore,  the  whole  insurance  (such 
as  it  is)  is  not  less  than  80%  of  the  value  of  the  property, 
and  the  insured  collects  his  entire  loss  of  $200,000  from  the 
blanket  insurer. 

Let  us,  however,  raise  the  sound  value  of  either  Building 
“A”  or  “B”  by  a  single  dollar,  thus  making  the  total  sound 
-value  $400,001  instead  of  $400,000,  and  what  is  the  effect 
upon  the  fortunes  of  the  insured?  The  whole  amount  of 
insurance  on  the  property  is  less  than  80%  of  the  actual  cash 
value  thereof,  and  the  insured  under  the  conditions  of  the 
■clause  can  collect  only  200,000/320,000  of  $200,000,  or  $125,000. 
'Thus,  the  addition  of  $1.00  to  the  sound  value  results  in  a 
reduction  of  $75,000  in  the  amount  collectible  by  the  insured. 
This  discriminatory  absurdity  is  the  direct  and  logical  result 
of  the  construction  which  lawyers,  adjusters,  and  companies 
feel  constrained  to  place  upon  the  percentage  co-insurance 
clause  in  circumstances  such  as  those  above  outlined. 

This  clause,  under  conditions  similar  to  those  under  con¬ 
sideration  has  been  before  the  courts  but  once,  and  that  was 
in  the  case  of  the  Northwestern  Fuel  Co.  vs.  Boston  Ins.  Co. 
(131  Minn.  19;  154  N.  W.  513;  46  Ins.  Law  Journal  715). 
The  court  admitted  that  the  question  of  construction  was  not 
free  from  difficulty,  but  said  “In  view  of  the  rule  of  con¬ 
struction  favorable  to  the  insured,  the  uncertainty  of  the  pre¬ 
cise  application  of  the  co-insurance  clause  and  the  disfavor 
with  which  the  law  regards  provisions  for  co-insurance,  the 
trial  court  properly  held  that  the  condition  as  to  co-insurance 
was  satisfied.”  The  loss  was  confined  to  one  item,  and  it  was 
held  that  the  clause  did  not  reduce  the  collectible  loss  because 
the  total  insurance,  including  the  non-contributing  specific 
insurance,  was  not  less  than  the  percentage  named  in  the 
policy ;  this  being  confirmatory  of  the  view  generally  held 
with  respect  to  the  clause  under  such  conditions.  The  court, 
however,  strongly  intimated  that  if  the  co-insurance  clause 
had  provided  for  the  maintenance  of  concurrent  insurance, 
it  might  have  held  otherwise. 


8 


A  clause  which  is  so  discriminatory  in  the  effect  of  its 
operation,  even  though  in  a  comparatively  few  cases,  should 
have  been  thrown  into  the  discard  long  ago,  and  given  way 
to  the  reduced  rate  contribution  clause  which  is  the  latest, 
best,  and  fairest  that  has  appeared  in  the  evolutionary  process 
of  the  co-insurance  principle. 

The  third  clause  is  that  which  for  many  years  has  been 
in  use  in  New  York  City,  and  is  known  as  the  “Average 
Clause.”  It  provides  that : 

“this  company  shall  not  be  liable  for  a  greater  pro¬ 
portion  of  any  loss  or  damage  to  the  property  herein 
described  than  the  sum  hereby  insured  bears  to  — % 
of  the  actual  cash  value  of  said  property  at  the  time 
such  loss  shall  happen.” 

This  it  will  be  noted  is  substantially  the  same  as  the  closing- 
paragraph  of  the  percentage  co-insurance  clause  which  we 
have  just  been  considering,  and  its  main  feature  is  virtually 
the  same  as  the  reduced  rate  contribution  clause,  which  is 
the  fourth  and  last  to  claim  our  attention,  and  they  can 
properly  be  considered  together.  The  reduced  rate  con¬ 
tribution  clause  reads  as  follows : 

“In  consideration  of  the  rate  at  (and)  or  form 
under  which  this  policy  is  written,  it  is  expressly 
stipulated  and  made  a  condition  of  this  contract, 
that  this  company  shall  be  held  liable  for  no  greater 
proportion  of  any  loss  than  the  amount  hereby  in¬ 
sured  bears  to  — %  of  the  actual  cash  value  of  the 
property  described  herein  at  the  time  when  such  loss 
shall  happen ;  but  if  the  total  insurance  upon  such 
property  exceeds  — %  at  the  time  of  such  loss,  then 
this  company  shall  only  be  liable  for  the  proportion 
which  the  sum  hereby  insured  bears  to  such  total 
insurance,  not  exceeding  the  actual  amount  of  loss 
to  the  property  insured. 

“If  this  policy  be  divided  into  two  or  more 
items  the  foregoing  conditions  shall  apply  to  each 
item  separately.” 

It  differs  from  the  average  clause  only  in  the  fact  that 
it  is  prefaced  by  a  consideration,  and  also  embodies  the 
contribution  provision.  The  average  clause  was,  no  doubt, 
devised  for  the  express  purpose  of  correcting  the  defects 
above  referred  to  in  the  two  older  clauses,  and  with  the 
view  of  precluding  all  possibility  of  discrimination  and  mis¬ 
understanding  as  to  intention.  The  thought  is  as  clearly 
stated  as  it  is  possible  for  language  to  express  it,  so  that  no 
wayfaring  agent,  adjuster,  broker  or  attorney  need  err  in 
the  interpretation  thereof,  and  in  this  respect  is  an  improve¬ 
ment  on  the  old  co-insurance  clause,  which  some  people  seem 
to  think  passeth  human  understanding. 


9 


The  name  “average  clause”  is  not  a  particularly  appro¬ 
priate  one,  and  seems  to  have  been  copied  from  the  marine 
contract.  (It  should  not  be  confused  with  the  average  clause 
used  in  the  West  and  elsewhere,  and  which  is  known  in  the 
East  as  the  “average  distribution  clause.”)  Although  the 
title  “reduced  rate  contribution  clause”  might  be  applied  with 
equal  propriety  to  the  “three-fourths  value  clause”  or  the 
“three-fourths  loss  clause”  it  is  perhaps  as  good  a  name  as 
can  be  devised  to  distinguish  it  from  the  “co-insurance  clause.” 
In  order  to  apply  it  or  the  average  clause,  all  that  is  neces¬ 
sary  for  its  application  is  to  ascertain  the  actual  value  of  the 
property  described  in  the  policy,  whether  it  be  blanket  or 
specific,  and  there  is  thus  obtained  a  basis  for  determining 
the  denominator  of  the  fraction,  and  with  the  face  of  the 
policy  as  the  numerator  there  is  no  difficulty  in  finding  the 
limit  of  liability  under  the  clause. 

The  authors  of  the  average  clause  apparently  did  not 
deem  it  necessary  to  insert  the  contribution  provision  of  the 
policy  in  the  clause  itself,  evidently  assuming  that  the  words 
“shall  be  liable  for  no  greater  proportion  of  any  loss”  would 
be  sufficient  protection ;  but  when  the  reduced  rate  contribu¬ 
tion  clause  was  prepared  it  was  evidently  deemed  avisable  to 
insert  the  contribution  provision  therein,  thus  emphasizing 
the  fact,  if  any  emphasis  were  needed,  that  it  was  not  to  be 
superseded  by  the  reduced  rate  contribution  clause. 

The  failure  to  incorporate  the  contribution  provision  in 
the  average  clause  has  not  caused  the  insurers  any  special 
embarrassment  during  the  years  it  has  been  in  use,  but  it  gave 
the  Supreme  Court  of  New  York  (Erie  County)  in  the  case 
of  Buse  vs.  National  Ben  Franklin,  et  al  (160  N.  Y.  Supp.  566) 
(1916),  an  excuse  for  holding  that  where  co-insurance  condi¬ 
tions  are  present  in  all  policies,  and  the  aggregate  co-insur¬ 
ance  limits  of  liability  of  all  the  companies  is  less  than  the 
entire  loss,  the  contribution  clause  of  the  policy  is  not  ap¬ 
plicable.  This  is  at  variance  with  the  rule  laid  down  by  the 
New  York  Court  of  Appeals  in  the  case  of  The  Farmers  Feed 
Co.  vs.  Scottish  Union  &  National  Ins.  Co.,  175  N.  Y.  241, 
and  that  of  the  Supreme  Court  of  Wisconsin  in  the  case  of 
Stephenson  vs.  Agricultural  Ins.  Co.,  116  Wis.  2 77 ;  N.  W.  19. 
In  these  cases,  however,  all  the  policies  were  concurrent,  ex¬ 
cept  that  some  contained  the  co-insurance  or  average  clause 
and  others  did  not.  In  the  Buse  case,  the  policies  were  non¬ 
concurrent  as  to  form,  and  all  contained  the  average  clause 
and  it  was  by  reason  of  these  facts  that  the  court  apparently 
felt  warranted  in  distinguishing  it  from  the  Farmers  Feed 
Co.  case  (supra). 

The  court  quoted  lines  98-100  of  the  old  standard  policy, 
which  read : 

“and  the  extent  of  the  application  of  the  insurance 
under  this  policy,  or  of  the  contribution  to  be  made 
by  this  company  in  case  of  loss,  may  be  provided  for 
by  agreement  or  condition  written  hereon  or  attached 
or  appended  hereto,” 


10 


and  evidently  concluded  that  by  reason  of  this  provision  the 
average  clause  should  be  construed  as  superseding  the  con¬ 
tribution  clause  of  the  policy,  especially  if  the  necessities  of 
the  insured  required  such  construction.  If  the  contribution 
clause  had  been  incorporated  in  the  average  clause,  as  it  has 
been  in  the  reduced  rate  contribution  clause,  the  court  could 
hardly  have  taken  this  position  in  the  light  of  the  Farmers 
Feed  Co.  decision.  This  case  was  not  appealed,  and  is  referred 
to  here  simply  in  order  to  direct  attention  to  a  possible  weak¬ 
ness  in  the  average  clause  in  use  in  the  State  of  New  York. 
Although  by  a  lower  court,  the  decision  is  no  doubt  pleasing 
to  the  advocates  of  the  so-called  limit  of  liability  rule  of  ap¬ 
portionment,  inasmuch  as  it  affords  them  an  argument  in 
favor  of  putting  the  rule  into  effect  in  a  certain  class  of  cases 
in  localities  where  the  average  clause  is  in  use. 

All  of  these  four  clauses  contain  a  provision  reading  as 
follows : 

“If  this  policy  be  divided  into  two  or  more  items, 
the  foregoing  condition  shall  apply  to  each  item 
separately.” 

It  is  said  that  the  first  co-insurance  clause  prepared  did  not 
contain  this  condition,  but  the  underwriters  taking  counsel 
of  their  fears,  concluded  that  its  omission  might  be  fatal  to 
the  carrying  out  of  the  original  intention  in  connection  with 
policies  containing  more  than  one  item,  and  it  was  amended 
accordingly. 

All  the  clauses  also  contain  what  is  known  as  the  “Waiver 
of  Inventory  and  Appraisement  Clause,”  which  though  vary¬ 
ing  somewhat  in  different  sections,  reads  substantially  as 
follows : 

“In  the  event  that  the  aggregate  claim  for  loss 
does  not  exceed  five  per  cent  (5%)  of  the  total 
amount  of  the  insurance  upon  the  property  described 
herein  and  in  force  at  the  time  such  loss  occurs,  no 
special  inventory  or  appraisement  of  the  undamaged 
property  shall  be  required.” 

In  some  sections  this  percentage  is  limited  to  2%,  and  in 
others  no  special  inventory  or  appraisement  of  the  undam¬ 
aged  property  is  required  if  the  aggregate  claim  for  loss  is 
less  than  $10,000  (provided,  however,  such  amount  does  not 
exceed  5%  of  the  total  amount  of  insurance  upon  the  prop¬ 
erty  described  and  in  force  at  the'time  of  the  loss). 

Many  people  persist  in  placing  a  wrong  interpretation 
upon  this  condition,  and  among  the  number  are  prominent 
insurance  agents,  and  even  special  agents  and  adjusters.  They 
construe  it  as  an  absolute  waiver  of  the  co-insurance  clause, 
evidently  failing  to  realize  that  if  the  framers  of  the  provision 
had  intended  it  as  a  waiver  they  certainly  had  sufficient  words 
at  their  command  to  so  state,  and  would  not  have  deliberately 
said  something  else.  The  clause  simply  says  that  under  cer- 


tain  conditions  no  special  inventory  or  appraisement  of  the 
undamaged  property  shall  be  required.  The  company  may 
resort  to  any  method  other  than  this  to  ascertain  the  sound 
value ;  it  may  have  ex  parte  estimates  made ;  it  may  secure  the 
opinion  of  experts ;  examine  books  of  account ;  examine  the 
insured  under  oath  ;  insist  upon  the  sound  value  being  sworn 
to  in  the  proofs  of  loss ;  and,  finally,  it  may  let  the  court 
decide  upon  the  value  on  evidence  submitted.  And,  if  a 
claimant  should  materially  understate  the  value  in  the  exam¬ 
ination  or  in  the  proofs  of  loss,  he  might  and  probably  would 
invalidate  his  claim  by  reason  of  false  swearing.  This,  it  will 
be  seen,  is  far  from  an  absolute  waiver  of  the  condition. 

In  New  York  City  several  years  ago,  a  loss  of  about 
$15,000  occurred  on  a  large  building  owned  by  a  gentleman 
of  wealth.  The  insurance  carried  was  only  $400,000,  and  the 
apparent  value  was  many  times  that  amount.  The  insured 
evidently  assumed  that  inasmuch  as  the  loss  was  less  than 
5%  of  the  insurance,  the  80%  average  clause  was  inoperative, 
but  he  was  told  to  file  his  proofs  of  loss  and  make  affidavit  as 
to  the  sound  value.  He  hesitated,  but  after  several  months 
delay,  proofs  were  filed  showing  a  sound  value  of  about 
$2,500,000,  and  he  was  under  the  necessity  of  standing  about 
80%  of  the  loss  himself  on  account  of  under-insurance. 

Years  ago,  the  co-insurance  clause  contained  a  provision 
waiving  its  application  if  the  loss  amounted  to  less  than  5% 
of  the  insurance ;  later  it  was  changed  so  as  not  to  require  a 
special  inventory  under  those  conditions,  and  still  later,  within 
the  past  few  years,  it  assumed  its  present  form.  In  some  sec¬ 
tions  the  clause  used  to  be  so  phrased  as  not  to  require  a 
special  inventory  or  appraisement  of  the  undamaged  property 
if  the  loss  was  less  than  5%  of  the  actual  cash  value  of  the 
property.  Under  this  form  it  would  be  necessary  to  ascertain 
the  sound  value  in  some  way  in  order  to  determine  whether 
or  not  it  was  necessary  to  find  it.  With  the  advent  of  the 
uniform  rules  and  clauses,  this  form,  fortunately,  went  into 
harmless  disuse. 

In  Canada  a  clause  is  in  use  containing  the  following 
condition  : 

“In  case  of  loss  the  co-insurance  clause  shall  not 
be  held  to  apply  where  the  total  loss  does  neither  ex¬ 
ceed  $2,500  nor  2%  of  the  sum  insured  on  the  in¬ 
volved  item  or  items  of  the  schedule.” 

There  would  seem  to  be  no  good  reason  why  this  same  pro¬ 
vision,  with  possibly  some  modification  as  to  amount,  might 
not  be  adopted  in  this  country. 

A  question  of  no  little  interest,  and  one  which  is  asked 
quite  frequently,  is  whether  the  mortgagee  under  the  mort¬ 
gagee  clause  is  bound  by  the  terms  and  conditions  of  the  co- 
insurance  or  reduced  rate  contribution  clause.  A  prominent 
attorney  has  expressed  the  opinion  that  the  interest  of  the 


12 


mortgagee  cannot  be  affected  by  the  co-insurance  clause  un¬ 
less  it  is  made  to  appear  in  clear  and  explicit  terms  that  the 
mortgagee  agrees  to  be  bound  by  the  provisions  of  the  clause 
as  a  part  of  his  contract  with  the  company;  in  other  words, 
unless  it  be  incorporated  in  the  mortgagee  clause  directly  or 
by  reference.  Another  authority  has  expressed  the  opinion 
that  the  mortgagee  would  not  be  bound  by  the  co-insurance 
clause  as  applied  to  the  value  of  the  property,  and  if  applicable 
at  all,  it  would  apply  only  to  the  value  of  the  mortgagee’s 
interest;  in  short,  that  the  words  “value  of  property”  would 
be  construed  to  mean  “value  of  interest.”  According  to  a 
third  authority,  the  mortgagee  is  bound  by  the  co-insurance 
clause  as  applied  to  the  sound  value  of  the  property. 

We  have  here  three  different  opinions  from  high  legal 
and  lay  authorities,  but  in  July,  1915,  the  Appellate  Division, 
Second  Department,  of  the  Supreme  Court  of  New  York,  in 
the  case  of 

Hartwig  vs.  American  Ins.  Co.  of  Newark  (154  N.  Y. 
Supp.  801)  (Ins.  Law  Journal,  vol.  46,  page  455) 
rendered  a  decision  in  which  it  was  held  that  the  mortgagee 
is  bound  by  the  terms  and  conditions  of  the  80%  average 
clause,  and  on  the  14th  day  of  April,  1919,  the  United  States 
District  Court  for  the  Eastern  District  of  Pennsylvania  ren¬ 
dered  another  decision  to  the  same  effect,  the  latter  case  being 

Pennsylvania  Co.  for  Insurance  on  Lives  and  Grant¬ 
ing  Annuities  vs.  Aachen  &  Munich  Fire  Insur¬ 
ance  Company  (257  Fed.  Rep.  189,  Sept.,  1919), 

(Ins.  Law  Journal,  page  291). 

It  will  be  noted  that  these  decisions  are  in  harmony  with 
the  third  opinion  above  referred  to,  and  according  to  the  view 
of  the  present  writer,  as  expressed  in  an  address  delivered  by 
him  on  “The  Mortgagee  Clause,”  several  years  ago,  they  are 
eminently  sound. 

“The  average,  or  co-insurance  clause,  is  a  part  of  the 
contract  with  the  mortgagee  himself,  and  when  he  accepts  the 
policy  with  this  provision  therein  it  is  his  own  act ;  he  should 
be  as  much  bound  by  it  as  by  the  amount  of  the  policy,  date 
of  expiration,  and  description  of  the  property.  This  imposes 
no  hardship  upon  him ;  his  interests  are  not  placed  at  the 
mercy  of  third  parties,  and  the  arguments  advanced  against 
the  operation  of  the  contribution  clause  do  not  apply.  He 
can  insist  upon  insurance  payable  to  himself  being  taken  out 
equal  to  the  necessary  percentage  of  the  value  of  the  prop¬ 
erty,  and  thereby  secure  absolute  protection,  and  it  is  the  rule 
with  certain  large  loaning  institutions  to  insist  upon  this  in 
order  to  meet  the  requirements  of  the  clause,  unless  they 
regard  their  security  as  ample  without  it.  If,  however,  extra¬ 
ordinary  improvements  or  repairs  are  made  to  the  building 
after  a  policy  is  issued,  without  the  knowledge  of  the  mort¬ 
gagee,  thereby  materially  increasing  the  value  of  the  prop- 


- ~ii— — — — ■  - - - 


erty,  this  would  be  an  act  of  the  owner,  by  which  the  mort¬ 
gagee  would  not  be  bound.” 

The  phrase,  “for  account  of  whom  it  may  concern,”  and 
its  running  mate,  the  “commission  or  in  trust  clause,”  have 
probably  been  in  use  for  a  century  or  more,  yet  it  may  well 
be  doubted  whether  many  of  the  insuring  public,  or  in  fact, 
any  considerable  proportion  of  those  engaged  in  the  business 
of  fire  insurance,  are  aware  of  its  far-reaching  effects.  It 
certainly  is  not  generally  known  that  if  the  policy  of  a  ware¬ 
houseman  or  other  bailee  contains  the  commission  clause  he 
cannot  first  reimburse  himself  for  his  own  loss  from  the  in¬ 
surance  fund,  but  that  if  under-insured,  whether  he  be  legally 
liable  or  not,  he  must  pro-rate  the  amount  collected  with  such 
bailors  as  may  adopt  his  insurance,  after  the  loss  has  occurred, 
although  he  will  have  a  lien  against  the  amounts  due  the 
respective  bailors  for  advances  or  charges,  if  any,  that  may 
have  accrued. 

If,  in  addition  to  the  broad  coverage  created  by  the  use 
of  the  above  and  kindred  phrases,  the  policies  contain  the 
co-insurance  or  average  clause,  the  insured  is  liable  to  still 
greater  embarrassment  by  reason  of  his  undoubted  uninten¬ 
tional  generosity.  In  the  first  instance  he  may  sustain  a  loss 
by  reason  of  the  mere  fact  that  he  is  under-insured,  but  if 
co-insurance  conditions  be  present,  he  may  sustain  an  addi¬ 
tional  loss  by  reason  of  the  value  of  all  property  in  his  cus¬ 
tody  being  included  for  co-insurance  purposes,  thus  reducing 
the  amount  that  would  otherwise  be  collectible.  This  applies 
to  a  railroad  company  or  other  common  carrier,  a  warehouse¬ 
man  or  other  bailee,  also  to  a  hotel  proprietor  or  householder 
who  includes  in  his  policies  the  property  of  his  guests  and 
servants. 

Several  very  nice  questions  suggest  themselves  in  this 
connection.  Can  the  entire  value  of  the  property  in  the  pos¬ 
session  of  the  warehouseman  be  included  for  co-insurance 
purposes  under  the  unrestricted  “trust  and  commission  clause” 
in  all  circumstances?  If  claim  is  made  for  damage  on  any 
portion  of  the  bailor’s  goods,  or  if  the  bailee  has  agreed  to 
keep  the  property  insured,  or  if  for  any  reason  he  is  legally 
liable  for  the  loss  thereon,  the  value  must  be  taken  into  con¬ 
sideration.  But  if  (1)  the  bailor  has  specific  insurance  of  his 
own  sufficient  to  cover  his  loss,  or  (2)  if  his  goods  are  not 
involved  in  the  loss  and  there  is  consequently  no  necessity 
of  his  ratifying  the  bailee’s  insurance,  or  (3)  if  the  bailee  has 
no  lien  against  the  goods  for  storage  or  advances,  and  no 
personal  liability,  can  this  value  be  included  for  co-insurance 
purposes?  There  is  not,  to  the  present  writer’s  knowledge, 
any  recorded  case  involving  these  questions,  but  some  good 
arguments  can  be  advanced  in  support  of  the  view  that  the 
value  of  the  bailor’s  goods,  in  some  of  these  circumstances 
at  least,  should  not  be  included. 


14 


The  new  advisory  mercantile  form  recently  adopted,  both 
in  the  East  and  in  the  West,  contains  the  restricted  commis¬ 
sion  clause,  which  only  covers  goods  belonging  to  others,  pro¬ 
vided  the  insured  is  legally  liable  therefor.  Some  difficulty 
may  be  experienced  at  times  in  determining  whether  or  not  a. 
legal  liability  exists,  but  this  new  form  which  is  intended  to 
prevent  the  indiscriminate  adoption  or  appropriation  of  the 
bailee’s  insurance  by  others  should  be  generally  acceptable 
to  the  mercantile  world.  Without  discussing  the  reasons,  it 
is  suggested,  in  passing,  that  this  form  might  be  improved 
by  adding  the  words,  “at  the  time  of  the  fire,”  and  making 
it  read : 

“provided  the  insured  is  legally  liable  at  the  time 
of  the  fire.” 

There  is  an  admonition  on  the  back  of  both  the  old  and 
new  standard  policies  which,  if  heeded,  would  save  the  ad¬ 
justers,  the  brokers,  the  companies  and  the  insured  no  end 
of  trouble,  and  enable  the  Committee  of  Seventeen,  appor¬ 
tionment  experts,  who  were  appointed  several  years  ago  to 
prepare  a  universal  rule  of  apportionment,  to  adjourn  sine  die. 
It  reads  as  follows: 

“It  is  important  that  the  written  portion  of  all 
Policies  covering  the  same  property  read  exactly 
alike.  If  they  do  not  they  should  be  made  uniform 
at  once.” 

Nonconcurrence  is  always  undesirable,  and  it  is  partic¬ 
ularly  so  when  the  policies  contain  the  co-insurance,  or  av¬ 
erage,  clause.  The  insured  may  have  insurance  in  the  aggre¬ 
gate  for  an  amount  in  excess  of  the  sound  value  of  his 
property,  but  may  by  reason  of  nonconcurrence  be  compelled 
to  stand  a  portion  of  the  loss  himself.  If  the  policies  cover 
blanket  in  two  or  more  buildings,  subject  to  the  average  or 
co-insurance  clause,  and  the  average  distribution  clause  is 
also  inserted  in  any  of  the  policies,  it  should  be  inserted  in 
all. 


A  single  illustration  will  be  sufficient  to  demonstrate  the 
possible  adverse  effect  upon  the  interests  of  the  insured  when 
co-insurance  is  present  in  nonconcurrent  policies : 


Sound 

Specific 

Blanket 

V  alue. 

Loss* 

Insurance. 

Insurance. 

Stock 

$10,000.00 

$8,000.00 

$6,750.00 

Machinery 

12,222.22 

None. 

3,250.00 

$10,000.00 

Total, 

$22,222.22 

$8,000.00 

$10,000.00 

$10,000.00 

90%  Co-insurance  Clause  in  all  policies. 

90%  of  $22,222.22  =  $20,000.00. 

If  there  were  no  co-insurance  clause  in  the  policies  it  is 
evident  that  the  loss  on  stock  under  the  rule  laid  down  in  the 


15 


case  of  Page  Bros.  vs.  Sun  Insurance  Office  (74  Fed.  203 ; 
20  C.  C.  A.  397),  would  be  apportioned  as  follows: 

Insures.  Pays. 

Specific  policy  $  6,750.00  $3,223.88 

Blanket  policy  10,000.00  4,776.12 

Total,  $16,750.00  $8,000.00 

But  the  liability  of  the  blanket  policy  is  limited  by  the  opera¬ 

tion  of  the  90%  co-insurance  clause  to  10,000/20,000  of  $8,000, 
or  $4,000,  which  is  $776.12  less  than  the  amount  shown  in  the 
above  apportionment;  hence  the  insured  loses  $776.12  by  rea¬ 
son  of  the  operation  of  the  co-insurance  clause  in  the  blanket 
policy,  notwithstanding  the  fact  that  the  total  insurance  car¬ 
ried  equals  90%  of  the  total  value. 

If  the  average  clause  in  use  in  the  State  of  New  York 
were  attached  to  the  policies,  the  advocates  of  the  limited 
liability  rule  would  apportion  the  above  loss  as  follows: 
Co-insurance  limit  of  stock  insurance, 

6,750/9,000  of  $8,000,  $6,000 
Co-insurance  limit  of  blanket  insurance, 

10,000/20,000  of  $8,000,  $4,000 
Apportioning  the  loss  on  the  basis  of  these  co-insurance  limits 
of  liability,  the  stock  insurance  would  pay 

6,000/10,000  of  $8,000,  $4,800 
the  blanket  insurance  would  pay  4,000/10,000  of  $8,000,  $3,200 
It  will  be  seen  that  under  the  rule  laid  down  in  the  Buse 
case  the  insured  would  collect  his  entire  loss,  whereas,  under 
the  first  apportionment,  he  would  lose  $776.12.  The  decision 
in  the  Buse  case  would  have  greater  weight  if  it  had  been 
rendered  by  the  Court  of  Appeals  instead  of  by  a  lower  court ; 
in  fact,  it  would  then  be  controlling  in  the  State  of  New  York, 
under  the  application  of  the  average  clause. 

There  is  a  popular  misconception  regarding  the  80%  co- 
insurance  clause.  Many  persons  have  the  impression  that  if 
an  80%  clause  of  whatever  form  is  attached  to  the  policy  they 
can  not  collect  more  than  80%  of  the  loss,  no  matter  how 
much  insurance  they  may  have.  Nothing  is  farther  from  the 
truth.  It  is  axiomatic  that  if  the  loss  equals  or  exceeds  the 
percentage  named  in  the  clause  the  insurer  is  liable  for  the 
entire  loss  up  to,  but  of  course  not  exceeding,  the  amount  of 
insurance,  and  the  amount  collectible  is  not  affected  in  the 
slightest  degree  by  the  co-insurance  clause. 

There  is  another  thing  in  connection  with  the  operation 
of  the  80%  co-insurance  clause  that  is  also  axiomatic.  If  the 
loss  is  to  be  settled  on  an  agreed  percentage  of  the  total  sound 
value  of  the  property  (but  not  otherwise)  the  sound  value 
may  be  increased  or  decreased  to  any  extent  that  the  insured 
may  desire,  and  it  will  not  alter  the  amount  collectible  from 
the  insurers,  so  long-  as  the  co-insurance  clause  remains  op¬ 
erative.  If,  however,  in  his  desire  to  escape  the  operation  of 
the  co-insurance  clause  the  claimant  should  insist  upon  the 


16 


sound  value  (and  consequently  the  loss)  being  reduced  to  such 
an  extent  as  to  render  the  clause  inoperative,  it  would  result 
in  his  undoing,  and  he  would  collect  less  than  he  otherwise 


might. 

The  following  will  illustrate  this  point: 

1.  Sound  value,  $20,000 

Insurance,  10,000 

Loss  40%  of  value,  8,000 

80%  Clause. 

Company  pays  10,000/16,000  of  $8,000,  or  $5,000 

2.  Increase  Value  and  Loss  40%  : 

Sound  value,  $28,000 

Insurance,  10,000 

Loss  40%  of  value,  11,200 

80%  Clause. 

Company  pays  10,000/22,400  of  $11,200,  or  $5,000 

3.  Decrease  Value  and  Loss  40%  : 

Sound  value,  $12,000 

Insurance,  10.000 

Loss  40%  of  value,  4,800 

80%  Clause  inoperative. 

Company  pays,  $4,800 


Several  years  ago  the  question  arose  as  to  whether  a  co- 
insurance  rider  attached  to  the  Massachusetts  standard  form 
of  fire  policy  violated  the  statute  of  that  state  prescribing 
such  standard  form  and  providing  for  adding  to  or  modifying 
the  provisions  contained  therein,  and  it  was  held  that  it  did 
not,  and  that  the  co-insurance  clause  was  permissible. 

(Quinn  vs.  Fire  Assn.,  180  Mass.  560;  62  N.  E.  890; 

31  Ins.  Law  Journal  460;  Mass.,  St.  1894,  C  22, 

Sec.  60.) 

This  decision  would  seem  to  suggest  the  permissibility  of 
various  other  riders  to  the  Massachusetts  policy  under  the 
standard  policy  law  of  that  state. 

In  Louisiana,  in  the  case  of  Simon  vs.  Queen  Ins.  Co. 
of  America  (120  La.  477;  45  So.  396),  it  was  held  that  the 
valued  policy  law  of  that  state  did  not  prohibit  the  use  or 
application  of  the  old  co-insurance  clause,  but  since  this 
decision  was  rendered  the  law  has  been  changed  so  as  to  limit 
the  application  of  the  clause  to  policies  covering'  personal 
property. 

Is  the  co-insurance  clause  a  waiver  of  the  “other  insur¬ 
ance”  provision  in  the  printed  conditions  of  the  policy?  It 
is  self-evident  that  it  operates  as  a  permit  for  other  insurance 
to  the  amount  required  to  make  up  the  stated  percentage  of 
value,  but  it  has  been  held  that  it  does  not  supersede  a  pro¬ 
vision  that  the  policy  shall  be  void  in  case  of  other  insurance 
when  that  policy  itself  is  for  an  amount  in  excess  of  the  stated 
percentage  of  the  value  of  the  property  (Cutler  vs.  Royal 
Ins.  Co.,  70  Conn.  566;  40  Atl.  529;  41  L.  R.  A.  159).  It 
would,  however,  appear  to  be  a  harsh  rule  which  would  require 


17 


the  insured  to  maintain  insurance  to  the  amount  of  a  stated 
percentage  of  the  value  of  the  property,  and  which  would 
render  the  policy  void  if  in  an  honest  effort  to  meet  the  re¬ 
quirement  he  should  happen  to  exceed  the  percentage  named, 
and  it  may  well  be  doubted  whether  such  a  rule  would  be 
generally  upheld  by  the  courts. 

This  question,  however,  can  hardly  arise  in  connection 
with  the  average  clause  or  reduced  rate  contribution  clause, 
inasmuch  as  these  are  simply  provisions  restricting  liability 
and  do  not  specifically  require  the  insured  to  maintain  any 
stated  percentage  of  insurance.  Therefore,  if  the  insured 
takes  out  other  insurance  it  is  quite  important  for  him  to  have 
a  permit  endorsed  on  the  policy,  if  it  contains  the  average  or 
reduced  rate  contribution  clause,  and  it  would  be  advisable 
for  him  also  to  have  such  endorsement  made  if  the  policy 
contains  the  old  co-insurance  clause. 

It  would  be  interesting  to  give  further  consideration  to 
the  effect  which  co-insurance  conditions  may  have  upon  the 
apportionment  of  losses  in  cases  of  nonconcurrence,  but  this 
is  a  subject  in  itself,  and  beyond  the  purview  of  this  paper. 
It  is  sufficient  to  say  that  the  advent  of  co-insurance  has 
tended  to  discredit  in  a  measure  all  the  old  rules  for  the  ap¬ 
portionment  of  losses  under  nonconcurrent  policies,  and  that 
there  is  open  to  some  inquiring  mind  or  inventive  genius  of 
the  future  the  opportunity  of  discovering  what  the  present 
generation  of  adjusters  has  seemingly  been  unable  to  discover, 
and  that  is  a  rule  which,  although  it  may  not  be  universally 
applicable,  will  generally  serve  the  ends  of  justice  under 
present  underwriting  conditions. 

EXAMPLES  ILLUSTRATING  THE  OPERATION  OF 
CO-INSURANCE  CLAUSES  UNDER  VARYING 


CONDITIONS : 

EXAMPLE  1 

80%  Co-insurance,  Average  or  Reduced  Rate  Contribution 

Clause 

Sound  value .  $5,000 

Insurance  that  the  insured  should  carry .  4,000 

Insurance  carried .  3,000 

Loss  . 2,000 

Company  pays  3000/4000  of  $2000  or .  1,500 

Insured  loses  1000/4000  of  $2000  or .  500 

example  2 

80%  Co-insurance,  Average  or  Reduced  Rate  Contribution 

Clause 

Sound  value .  $5,000 

Insurance  that  the  insured  should  carry .  4,000 

Insurance  carried .  4,000 

Loss . . . : .  2,000 

Company  pays  4000/4000  of  $2000  or .  2,000 

Insured  loses  0000/4000  of  $2000  or . Nothing 


18 


EXAMPLE  3 

100%  Co-insurance,  Average  or  Reduced  Rate  Contribution 


Clause 

Sound  value .  $5,000 

Insurance  that  the  insured  should  carry .  5,000 

Insurance  carried .  3,000 

Loss  .  2,000 

Company  pays  3000/5000  of  $2000  or .  1,200 

Insured  loses  2000/5000  of  $2000  or .  800 

example  4 

100%  Co-insurance,  Average  or  Reduced  Rate  Contribution 

Clause 

Sound  value .  $5,000' 

Insurance  that  the  insured  should  carry . : .  5,000 

Insurance  carried .  5,000' 

Loss  .  2,000 

Company  pays  5000/5000  of  $2000  or .  2,000 

Insured  loses  0000/5000  of  $2000  or . Nothing 

example  5 

Blanket  policy  covering  in  several  buildings.  100%  Co-insur¬ 
ance,  Average  or  Reduced  Rate  Contribution  Clause 

Stock  in  Building  A .  $  5,000 

Stock  in  Building  B . 10,000 

Stock  in  Building  C . ’ .  8,000 

Stock  in  Building  D . 7,000 


$30,000 

Insurance  carried .  30,000 

As  insurance  is  carried  for  the  full  value  of  the  property 
there  is  no  contribution  by  the  insured  for  any  loss  either  total 
or  partial. 


example  6 

Blanket  policy  covering  in  several  buildings.  100%  Co-insur¬ 
ance,  Average  or  Reduced  Rate  Contribution  Clause 

Stock  in  Building  A .  $  5,000 

Stock  in  Building  B . , .  10,000 

Stock  in  Building  C . : .  8,000 

Stock  in  Building  D . . . . .  7,000 


$30,000 


Insurance  carried .  15,000 

Loss  in  Building  B .  5,000 

Company  pays  15000/30000  of  $5000  or .  2,500 

Insured  loses  15000/30000  of  $5000  or .  2,500 


19 


2 


The 

Fire  Insurance  Policy 
as  a  Contract 

A  LECTURE 


W.  N.  BAMENT 

General  Adjuster 


THE  HOME  INSURANCE  COMPANY 

NEW  YORK 


The  Fire  Insurance  Policy  as  a 

Contract 


4 

{ 


William  N.  Bament,  General  Adjuster 
The  Home  Insurance  Company,  New  York 


The  seal  used  by  the  Insurance  Department  of  the  State 
of  New  York  for  many  years  contained  the  following  in¬ 
scription:  “ Alter  alterius  onera  portate” — “Bear  ye  one  another’s 
burdens,”  and  it  would  be  difficult  to  conceive  of  a  more 
highly  appropriate  motto  for  such  a  department,  or  a  more 
felicitous  expression  with  which  to  symbolize  the  underlying 
principle  of  insurance. 

According  to  the  authorities,  insurance  was  originally 
held  to  be  in  effect  nothing  but  a  mere  wager,  and  it  was  a 
matter  of  grave  doubt  whether  as  a  principle  of  ethics  it 
should  be  allowed,  but  for  many  years  it  has  been  regarded 
as  the  handmaid  of  commerce  and  an  absolute  business  neces¬ 
sity,  the  gambling  element  being  eliminated  or  reduced  to 
a  minimum  by  the  fact  that  in  order  to  support  a  valid 
contract  the  party  insured  must  have  an  insurable  interest  in 
the  subject  thereof. 

It  is  undoubtedly  true  that  in  the  early  part  of  the 
eighteenth  century,  in  addition  to  the  regular  business  of 
insurance,  wagering  contracts  were  issued  both  in  England 
and  on  the  Continent,  covering  almost  every  conceivable 
subject  or  event,  but  about  the  middle  of  the  same  century 
the  issuing  of  wagering  policies  was  prohibited  by  statute 
and  Lord  Mansfield,  who  may  justly  be  regarded  as  the  father 
of  insurance  law,  rendered  his  famous  decision  making  an 
insurable  interest  the  basis  of  the  contract.  This  put  an  end 
to  the  demoralizing  practice  and  paved  the  way  for  the 
marvelous  development  of  legitimate  insurances,  and  placed 
the  business  upon  the  high  plane  where  it  now  rests  and  where 
it  is  universally  regarded  as  one  of  the  bulwarks  of  our 
mercantile,  industrial  and  social  life. 

The  oldest  form  of  insurance  is  marine,  which  was 
doubtless  in  vogue  among  the  ancients,  but  did  not  assume 
anything  approaching  its  present  form  until  the  twelfth  or 
thirteenth  century,  when  it  was  taken  up  by  the  Lombards 
who  resided  in  Northern  Italy.  They  had  branches  in  all 


1 


the  important  cities  of  Europe  and  some  of  them  settled  in 
London,  and  Lombard  Street,  London,  which  takes  its  name 
from  them,  became  in  time  the  great  marine  underwriting 
center  of  the  world. 

It  was  not,  however,  until  the  great  London  conflagra¬ 
tion  of  1666,  that  people  awoke  to  a  realization  of  the  great 
danger  of  loss  by  fire,  and  it  was  not  until  thirty  years 
later  that  anything  except  sporadic  efforts  were  made  toward 
placing  fire  insurance  upon  a  firm  basis,  but  during  the  past 
two  centuries  it  has  steadily  grown  in  public  favor  and  is 
now  by  far  the  most  popular  of  all  the  various  departments 
of  insurance. 

Contracts  of  insurance,  although  they  may  be  by  parol, 
are  almost  universally  reduced  to  writing  in  an  instrument 
called  the  “policy,”  which  word  is  most  probably  of  Italian 
derivation  and  signifies  a  promise  or  a  note  or  memorandum 
in  writing. 

In  addition  to  the  necessity  of  an  insurable  interest, 
there  are  a  number  of  other  elements  essential  to  a  legitimate 
contract  of  insurance ;  it  is  primarily  a  contract  of  indemnity ; 
it  requires  the  utmost  good  faith  on  the  part  of  all  parties 
thereto ;  there  must  be  a  risk  which  may  result  in  a  real  loss 
which  neither  party  has  the  power  to  avert  or  hasten,  and 
it  is  incumbent  upon  the  insured  to  communicate  to  the 
insurer  all  facts  material  to  the  risk. 

In  order  to  constitute  an  insurable  interest,  the  insured 
must  be  so  circumstanced  with  respect  to  the  property  subject 
to  loss  or  damage  by  fire,  that  he  may  be  benefited  by  its 
safety  or  prejudiced  by  its  destruction,  and  this  includes  a 
great  variety  of  relations. 

The  following  interests  may  be  mentioned  as  insurable : 
An  owner,  in  whole  or  in  part,  of  the  property ;  a  vendor 
and  vendee  under  an  executory  contract  of  sale ;  a  mortgagee ; 
a  remainderman ;  a  lessee  in  improvements  to  the  building  or 
land  or  in  his  profit  on  the  lease,  or  one  who  has  obligated 
himself  to  restore  the  property  or  to  pay  rent ;  a  landlord 
in  the  rents  or  rental  value  of  the  property ;  a  warehouseman 
or  bailee  in  advances  or  charges,  or  on  his  assumed  liability  ; 
a  common  carrier  on  its  liability ;  an  owner  in  his  profits  ; 
a  merchant  or  manufacturer  in  the  use  and  occupancy  of  his 
store  or  plant.  A  right  to  future  possession,  or  a  future 
interest,  no  matter  how  improbable  its  attainment,  will  support 
an  insurable  interest,  whereas  a  mere  expectancy,  no  matter 
how  probable  its  realization,  will  not,  although  recent  decisions 
by  certain  courts  in  this  country  seem  to  indicate  some  de¬ 
parture  from  this  time-honored  priniciple. 

A  policy  of  insurance  is  an  aleatory  contract  in  the  sense 
that  it  embodies  the  element  of  chance  and  is  contingent 
upon  some  event  which  may  or  may  not  occur.  It  is  a 
reciprocal  contract  in  that  it  involves  mutual  obligations. 


2 


It  is  a  voluntary  contract  whether  it  be  a  form  prescribed 
by  the  state  or  not,  and  when  issued  by  the  insurer  and 
accepted  by  the  insured,  both  are  bound  by  its  provisions. 
It  is  a  personal  contract  and  does  not' follow  the  property 
nor  pass  with  the  title  unless  assigned  with  the  consent  of 
the  insurer.  The  personal  nature  of  the  contract  becomes 
increasingly  evident  when  it  is  realized  that  it  is  not  property 
as  such  which  is  insured,  but  the  individual,  although  the 
words  “property  insured”  by  reason  of  continuous  use,  have 
become  an  insurance  idiom.  It  is  a  conditional  contract 
and  its  validity  depends  upon  its  conditions  being  complied 
with.  This  is  necessarily  so  for  the  reason  that  for  a  com¬ 
paratively  small  consideration,  the  insurer  may  be  called  upon 
to  pay  a  large  amount,  and  because  the  contract  is  designed 
to  cover  every  conceivable  class  of  property  and  protect 
virtually  every  interest  known  to  the  commercial  world. 

The  policy  must  protect  the  insurer  against  material 
misrepresentation,  abandonment  of  property,  over-insurance, 
over-loading  of  buildings,  extravagant  claims,  increase  in  risk 
and  moral  hazard,  both  before  and  after  a  loss,  for  inasmuch 
as  many  fires  are  welcomed  if  not  desired,  if  a  moral  hazard 
does  not  exist  before,  it  not  infrequently  develops  after  a 
loss  has  occurred.  It  is  on  this  account  and  because  insurance 
companies  deal  with  all  sorts  and  conditions  of  men  that  the 
standard  policy  in  current  use,  contains  provisions  exempting 
the  insurer  from  liability  for  any  one  of  a  dozen  or  more 
sins  of  commission  on  the  part  of  the  insured,  and  for  any 
one  of  an  equal  number  of  sins  of  omission,  and  provides 
that  the  company  shall  not  be  liable  for  loss  caused  in  a 
dozen  different  ways,  nor  for  loss  on  eight  classes  of  property 
under  any  circumstances,  nor  for  loss  on  about  a  score  of 
others  unless  liability  is  specifically  assumed  thereon.  For¬ 
tunately  for  the  public,  insurance  companies  do  not  always 
stand  upon  their  technical  rights,  but  on  the  contrary,  are 
disposed  to  view  all  meritorious  claims  in  a  spirit  of  the 
broadest  liberality.  It  is  doubtful  if  one  person  in  a  thousand 
ever  reads  his  policy,  especially  the  printed  conditions,  but 
it  is  not  the  only  well-known  piece  of  literature  relating  to 
protection  from  fire,  that  people  ought  to  read  but  do  not. 

The  adoption  of  a  standard  fire  policy  by  the  State  of 
New  York  in  1886,  marked  a  great  advance  in  the  insurance 
contract.  The  ornate  policies  in  use  prior  to  that  time,  with 
no  uniformity  in  conditions,  with  their  classification  of  haz¬ 
ards,  which  few  could  understand,  and  their  fine  print,  which 
no  one  not  possessing  unusually  acute  vision  could  read,  gave 
way  to  the  plainly  printed  uniform  policy,  which  materially 
simplified  conditions,  which  was  adopted  either  verbatim  or 
with  slight  modifications  by  other  states,  so  that  it  is  probably 
safe  to  say  that  for  the  past  thirty  years,  fully  seventy-five 
per  cent  of  all  the  policies  issued,  outside  of  the  states  having 
standard  policies  of  their  own,  have  been  the  New  York 

3 


Standard.  Although  this  has  not  resulted  in  uniformity  of 
decisions,  it  has  had  the  effect  of  materially  restricting  litigation 
and  has  been  of  incalculable  benefit  both  to  the  insurer  and 
the  insured.  A  new  standard  policy  is  to  go  into  effect  in 
New  York  January  1,  1918.  It  has  already  been  adopted  by 
several  states  and  will  no  doubt  be  by  others  in  the  not  dis¬ 
tant  future.  From  time  immemorial  it  has  been  the  uniform 
practice  of  the  courts  to  construe  the  insurance  contract  most 
liberally  in  favor  of  the  insured  as  against  the  insurer  in 
accordance  with  the  general  rule  that  the  contract  should  be 
construed  most  strictly  against  the  one  by  whom  it  is  pre¬ 
pared.  The  standardizing  of  the  policy  by  the  legislatures 
of  the  various  states  has  neutralized  this  tendency  to  some 
extent,  but  the  courts  can  safely  be  relied  upon  to  prevent 
forfeiture  if  it  can  be  done  without  undue  violence  to  the 
plain  intent  of  the  contract. 

Insurance  companies  are  not  inclined  to  resist  the  pay¬ 
ment  of  claims,  but  on  the  contrary,  they  sometimes  approach 
the  extreme  limit  of  propriety,  generosity  and  good  morals, 
in  their  efforts  to  avoid  litigation.  This  is  evidenced  by  the 
fact  that  of  all  the  losses  which  occur,  probably  not  more 
than  one-fifth  of  one  per  cent  become  the  subject  of  litigation, 
and  one-half  of  these  are  settled  before  the  cases  come  to 
trial.  To  put  it  another  way,  out  of  all  the  policies  issued, 
the  courts  are  not  called  upon  to  adjudicate  claims  under 
more  than  one  out  of  every  thirty  thousand,  which  may  be 
regarded  as  quite  a  favorable  commentary  upon  the  mutual 
fainnindedness  of  the  companies  and  the  insuring  public. 

Too  great  emphasis  cannot  be  laid  upon  the  contractual 
nature  of  the  policy.  By  accepting  it  the  insured,  in  the 
absence  of  mutual  error,  which,  of  course,  can  be  corrected, 
becomes  bound  by  all  the  descriptions,  representations,  war¬ 
ranties  and  conditions,  written  or  printed,  contained  therein. 
Every  property  owner  should  read  his  policy,  the  written 
portion,  in  order  to  see  that  everything  he  desires  covered 
is  mentioned  therein,  and  that  the  description,  location,  amount 
and  dates  are  correct ;  and  the  printed  portion,  in  order  to 
obtain  information  with  regard  to  his  duties  and  obligations. 
He  should  comply  with  all  conditions  of  the  contract  and 
be  in  a  position,  when  a  loss  occurs,  to  demand  as  a  right, 
and  not  to  receive  as  a  matter  of  grace,  payment  from  the 
insurer. 

An  analysis  of  the  conditions  of  the  contract  will  be 
impossible  at  this  time.  It  will  be  sufficient  to  say  that  the 
new  standard  policy  before  its  adoption,  received  the  most 
careful  consideration  at  the  hands  of  insurance  commissioners, 
legislative  committees  and  the  best  minds  in  the  fire  insurance 
business,  and  it  is  fair  to  conclude  that  it  contains  no  pro¬ 
visions,  except  those  which  years  of  experience  have  demon¬ 
strated  to  be  absolutely  necessary  to  the  safe  conduct  of  the 
business  and  to  the  support  of  a  wise  public  policy. 


4 


Although  all  enterprising  insurance  companies,  agents 
and  brokers  make  a  practice  of  notifying  their  customers  of 
the  expiration  of  their  policies,  they  are  under  no  obligation 
so  to  do ;  hence,  the  insured  should  not  only  keep  careful 
watch  over  his  expirations,  but  he  should  see  that  his  insur¬ 
ance  is  renewed  several  days  before  the  policies  expire.  The 
insurance  text  writers  and  the  courts  which  have  passed  on  the 
subject,  few  in  number  though  they  be,  have  held  to  the 
view  that  the  occurrence  of  a  loss  is  synchronous  with  the 
fire  actually  reaching  the  property  described  in  the  policy. 
Hence,  if  a  fire  or  conflagration  starts  in  neighboring  prop¬ 
erty  some  time  'before  noon,  the  insurance  expiring  at  noon, 
and  the  fire,  or  the  smoke,  heat  or  water  therefrom,  does  not 
reach  the  premises  until  after  noon,  the  owner  will  be  com¬ 
pelled  to  suffer  the  consequences  of  his  own  neglect  if  he 
has  failed  to  renew  his  policies.  (Insurance  Co.  vs.  Peaslee- 
Gaulbert  Co.,  [Ky.],  34  Ins.  Law  Journal,  740). 

This  question  as  to  when  a  loss  occurs,  in  circumstances 
such  as  those  above  outlined,  arose  at  Baltimore  and  San  Fran¬ 
cisco,  but  fortunately  for  the  parties  insured,  in  both  instances 
the  insurance  had  either  been  renewed  in  the  same  companies 
or  replaced  in  others  so  that  they  sustained  no  loss.  The 
claims  were  paid  under  the  new  policies.  Of  course,  if  a 
fire  breaks  out  in  the  described  premises,  and  continues  to 
burn  thereafter  until  the  property  is  totally  destroyed,  it  is 
deemed  one  event  and  the  entire  loss  is  one  occurring  within 
the  terms  of  the  policy. 

A  number  of  years  ago,  before  the  days  of  the  telephone, 
a  merchant  in  a  western  city,  started  from  his  place  of  busi¬ 
ness  in  the  suburbs  to  renew  the  insurance  on  his  packing 
house,  amounting  to  $100,000  which  was  to  expire  that  day 
at  noon.  He  was  unexpectedly  delayed  and  when  approach¬ 
ing  the  insurance  center,  the  fire  bell  rang.  He  supposed  it 
was  tolling  the  hour  of  noon,  but  it  was  sounding  the  death 
knell  of  his  business  career.  It  was  quarter  past  twelve, 
his  plant  was  on  fire  and  burned  to  the  ground.  And  this 
is  only  one  of  many  instances  of  a  similar  nature  which  have 
occurred  in  the  past  and  which  will  occur  in  the  future.  The 
insured  cannot  transfer  to  the  shoulders  of  others  the  respon¬ 
sibilities  which  properly  belong  to  his  own. 

When  it  is  considered  that  a  very  large  majority  of  all 
the  property  in  this  country,  of  every  kind  and  nature,  is 
protected  by  insurance,  that  about  thirty  million  fire  insur¬ 
ance  policies  are  issued  annually,  upon  which  the  premiums 
amount  to  nearly  half  a  billion  dollars,  that  the  losses  there¬ 
under  are  nearly  sixty  per  cent  of  that  amount,  that  these 
policies  furnish  collateral  for  loans  on  about  sixty  per  cent 
of  all  the  real  estate  in  the  country,  and  form  the  basis  of 
our  commercial  credit,  we  can  realize  that  of  all  the  forms 
of  contract  in  current  use,  there  is  none  more  indispensible 
to  the  business  world  than  the  contract  of  fire  insurance. 


5 


■ 

. 


What  is  a  Fire  Loss? 

Direct  and  Consequential  Loss 
AN  ADDRESS 

DELIVERED  BEFORE  THE  NINETY-EIGHTH 

MEETING 

OF 

The  Insurance  Society 

of  New  York 


November  24th,  1914 


BY 

W.  N.  BAMENT 

General  Adjuster 


Jpg) 


THE  HOME  INSURANCE  COMPANY 

NEW  YORK 


l 


What  is  a  Fire  Loss? 


When  Prometheus  brought  to  earth  as  a  gift  to  man  the 
fire  he  had  stolen  from  the  chariot  of  the  sun,  he  could  never, 
even  with  his  superhuman  attributes,  have  imagined  its  pos¬ 
sibilities  of  destruction  as  evidenced  by  wars  and  conflagra¬ 
tions,  or  the  magnitude  and  far  reaching  effect  of  its  benefits, 
which  have  their  practical  manifestation  in  the  arts  and 
sciences.  Nor  could  he  have  even  dimly  pictured  as  one  of 
the  results  of  his  benefaction  the  great  business  of  fire  insur¬ 
ance,  which,  after  an  evolutionary  process  of  over  two  hundred 
years,  may  in  The  Insurance  Society  of  New  York,  be  said  to 
have  reached  its  apogee. 

It  is  said  that  human  culture  began  with  the  utilization 
of  fire,  and  that  culture  increased  in  the  same  ratio  as  its 
use.  The  ancients,  the  barbaric  tribes,  and  even  our  forefathers 
were  interested  in  how  to  produce  and  preserve  it ;  we  are 
chiefly  interested  in  how  to  control  and  prevent  it.  It  was 
an  element  in  the  national  and  religious  ceremonies  of  the 
ancient  Egyptians,  the  Greeks,  Romans  and  Persians,  and 
among  the  aboriginal  tribes  of  America.  From  the  dawn  of 
civilization,  and  even  before,  the  human  race  has  been  more 
or  less  familiar  with  fire  and  its  phenomena,  yet  the  question, 
“What  is  a  fire?”  has  claimed  the  consideration  of  scientists, 
lawyers,  courts  and  juries,  and  possesses  enough  elements, 
if  not  of  doubt,  yet  certainly  of  interest,  to  command  the 
studious  attention  of  all  those  engaged  in  the  business  of  fire 
insurance. 

To  constitute  “fire”  within  the  meaning  of  a  policy  of 
fire  insurance,  two  requisites  are  necessary.  First,  there  must 
be  actual  ignition,  evidenced  by  a  flame,  glow,  or  something 
resembling  luminosity.  Second,  the  fire  must  be,  so  far  as 
the  insured  is  concerned,  accidental  in  its  origin.  Hence  a 
fire  in  a  stove,  grate  or  furnace,  no  matter  how  intense  it  may 
become,  or  the  flame  of  a  lamp,  oil  stove  or  gas  jet  no 
matter  how  high  it  may  rise,  so  long  as  it  is  confined  to  the 
place  where  it  is  intended  to  be,  is  not  a  fire  within  the  mean¬ 
ing  of  the  contract.  A  fire  of  this  character  is  denominated 
“friendly”  as  distinguished  from  “hostile,”  and  any  loss 
caused  bv  smoke,  heat  or  soot  from  such  fire,  or  by  the  burn¬ 
ing  of  property  therein,  is  not  covered  by  the1  policy. 


If,  however,  such  friendly  fire  extends  beyond  the  place 
intended  and  provided  for  it,  and  causes  ignition  outside  its 
proper  limits,  there  is  at  once  an  independent  fire,  fortuitous 
in  its  origin,  and  hostile  in  its  nature,  and  any  loss  resulting 
therefrom,  whether  by  direct  burning,  smoke  or  heat,  comes 
within  the  protection  of  the  policy. 

A  contract  of  fire  insurance  differs  from  ordinary  con¬ 
tracts  in  that  it  is  based  upon  an  event  which  is  possible  or 
liable,  but  not  certain,  to  occur.  Its  very  essence  is  embodied 
in  the  words  “casualty,”  “accident,”  “chance,”  “contingency.” 

The  insurer  undertakes,  for  a  comparatively  small  premium,  ( 

to  guarantee  the  insured  against  loss  upon  the  happening  of 
a  certain  event,  and  the  contract  implies  the  utmost  good 
faith.  If,  therefore,  the  insured  intentionally  sets  fire  to  his 
property  he  thereby  violates  the  essential  principle  of  the 
contract,  and  even  in  the  absence  of  a  special  stipulation, 
there  can  be  no  recovery.  And  it  is  not  necessary  that  any 
indictable  offense  be  shown  in  order  to  prevent  recovery  for 
the  willful  burning  of  the  property.  (Schmidt  vs.  New  York, 
etc.  Ins.  Co.,  1  Gray  [Mass.]  529). 

Recently  a  man  was  tried  on  the  charge  of  having  will¬ 
fully  set  fire  to  his  property.  The  jury  disagreed  by  reason 
of  the  fact  that  the  accused  on  the  stand,  evidently  upon  the 
advice  of  counsel,  made  the  remarkable  statement  that  he 
had  no  motive  for  burning  the  property  because  the  premises 
had  been  vacant  for  more  than  thirty  days,  and  therefore  his 
insurance1  policy,  which  was  for  several  thousand  dollars,  was 
null  and  void. 

Where,  as  in  some  of  the  older  forms,  the  policy  con¬ 
tained  a  stipulation  that  the  company  would  be  discharged 
from  the  payment  of  loss  caused  by  gross  negligence,  and 
it  having  been  proved  at  the  trial  of  the  case  that  the  fire  did 
occur  from  such  cause,  the  insurer  was  not  held.  (Camp¬ 
bell  vs.  Monmouth  Mut.  Fire  Ins.  Co.,  59  Me.  430;  5  Ben¬ 
nett  395). 

The  general  rule  is  that  carelessness  or  negligence  of  the 
insured,  his  agents  and  servants,  in  the  absence  of  a  special 
stipulation,  affords  no  defense.  Aside  from  the  difficulties 
in  the  way  of  determining  the  degree  of  negligence  which 
would  be  sufficient  to  cause  forfeiture,  negligence  is  a  well 
known  human  characteristic,  and  a  different  rule  would  prac¬ 
tically  defeat  the  chief  purpose  of  insurance.  (Waters  vs. 
Merchants’  Louisville  Ins.  Co.  11  Pet.  [U.  S.]  213;  1  Ben¬ 
nett  615).  ( 

On  the  other  hand  there  is  good  authority  in  favor  of 
the  doctrine  that  grave  misconduct  on  the  part  of  the  insured 
or  his  responsible  agent  of  so  pronounced  a  character  as  to 
evince  a  fraudulent  purpose,  a  corrupt  design,  or  a  culpable 
recklessness  and  indifference  to  the  rights  of  others,  or  the 
omission  to  do  that  which  good  faith  requires  that  he  should 
do,  would  warrant  a  verdict  excusing  the  insurer  from  liabil- 


2 


ity.  For  instance,  if  the  premises  should  take  fire  and  the 
flame  begin  to  kindle'  in  such  a  small  way  that  a  cup  of  water 
would  put  it  out,  and  the  insured  having  water  at  hand  should 
neglect  to  use  it ;  or  where  the  insured,  in  his  own  house,  sees 
the  burning  coals  in  the  fire  place  roll  down  on  his  wooden 
floor,  and  does  not  brush  them  up ;  or  if  the  insured  not  only 
neglects  to  save  the  property  himself  but  attempts  to  prevent 
others  from  saving  it,  the  loss  has  been  held  to  fall  upon 
the  insured  and  not  upon  the  insurer.  (Thornton  vs. 
Security  Ins.  Co.  [C.  C.]  117  Fed.  773;  Chandler  vs.  Worcester 
Mut.  Fire  Ins.  Co.,  3  Cush.  [Mass.]  328;  Ellsworth  et  al.  vs. 
Aetna  Ins.  Co.  89  N.  Y.  186;  Fleisch  vs.  Ins.  Co.  of  N.  Am. 
Mo.  App.  589;  Aurora  F'ire  Ins.  Co.  vs.  Johnson  46  Ind. 
315 — 326;  Cin.  Mut.  Ins.  Co.  vs.  May  20  Ohio  211). 
Ostrander  on  Ins. 

There  is  quite  a  conspicuous  absence  of  consistency  in 
the  decisions  bearing  on  this  question.  For  example,  the 
insured,  the  owner  of  a  steamboat,  while  racing  with  another 
boat  placed  a  barrel  of  turpentine  near  the  opening  in  the 
furnace,  intending  to  use  it  for  fuel,  and  as  a  consequence 
the  steamer  was  destroyed  by  fire.  His  conduct  was  not  will¬ 
ful,  yet  the  Court  held  that  there  could  be  no  recovery. 
(Citizens  Ins.  Co.  vs.  Marsh  41  Pa.  St.  386).  On  the  other 
hand,  where  an  ice  house  was  destroyed  by  the  spread  of  a 
fire  which  had  been  made  by  the  president  of  the  plaintiff 
corporation,  not  far  from  the  building,  for  the  purpose  of 
burning  some  rubbish,  and  which  had  been  left  burning  with¬ 
out  any  one  to  watch  it  during  the  noon  hour,  the  insurer 
was  held  liable.  (Des  Moines  Ice  Co.  vs.  Niagara  Fire 
Ins.  Co.  99  Iowa  193 ;  68  N.  W.  600). 

Every  insurance  company  has  numerous  instances  each 
year  where  negligence  is  quite  as  pronounced  as  in  either  of 
the  above  cases,  and  no  one  in  these  days  ever  thinks  of 
contesting  them.  It  is  probably  no  exaggeration  to  say  that 
a  majority  of  all  the  fire  losses  which  occur  are  directly 
chargeable  to  negligence  of  some  kind  on  the  part  of  the 
insured,  his  agents  or  servants. 

The  New  York  standard  policy  contains  a  condition 
making  it  incumbent  upon  the  insured  to  use  all  reasonable 
means  to  save  and  preserve  the  property  at  and  after  a  fire, 
or  when  the  property  is  endangered  by  fire  in  neighboring 
premises,  although  it  has  been  held  that  such  a  provision  does 
not  impose  any  additional  duty  upon  the  insured  because  it 
is  clearly  his  duty  to  do  this  without  any  express  provision 
in  the  policy.  Cincinnati  Mut.  Ins.  Co.  vs.  May  20  Ohio  211, 
[supra]  Gardere  vs.  Columbian  Ins.  Co.,  7  JohnsR. 514  [N.  Y.] . 
It  is,  however,  the  almost  universal  custom  for  the  insured, 
his  man  servants,  his  maid  servants,  and  everybody  else,  to 
lose  their  heads  in  the  presence  of  fire,  and  do  those  things 
which  they  should  not  do,  and  leave  undone  those  things 
which  they  should  do,  and  although  there  are  a  few  cases 


3 


on  record  of  such  a  flagrant  nature  that  the  insurers  were 
excused  (supra),  it  is  seldom  that  a  case  of  misfeasance  or 
nonfeasance  occurs  sufficiently  pronounced  to  induce  a  jury 
to  exempt  the  insurers  from  liability. 

If  the  insured  burns  his  property  while  insane,  his 
irresponsible  act  is  no  bar  to  recovery.  (Karow  vs.  Continen¬ 
tal  Ins.  Co.  57  Wis.  56;  15  N.  W.  27;  46  Am.  Rep.  17).  The 
act  of  a  third  party  in  setting  fire  to  the  property  whether 
unintentional,  careless  or  criminal,  or  that  of  an  agent  of  the 
insured  while  acting  outside  the  scope  of  his  authority,  will 
not  relieve  the  insurer  from  liability  unless  the  burning  was 
with  the  privity  or  consent  of  the  insured.  Likewise,  the 
intentional  burning  of  the  property  of  the  husband  by  the 
wife,  or  that  of  the  wife  by  the  husband,  or  that  of  the  father 
by  the  son  will  afford  no  defense  to  the  insurer.  (Walker 
vs.  Phoenix  Ins.  Co.  62  Mo.  App.  209;  Mickey  vs.  Burling¬ 
ton  Ins.  Co.  35  la.  174;  Grove  vs.  Ins.  Co.  48  N.  H.  41; 
Perry  vs.  Mechanics  Ins.  Co.  11  Fed.  485;  Plinsky  vs.  Ger¬ 
mania  Ins.  Co.  32  Fed.  47 ;  Feibelman  vs.  Manchester  Assur¬ 
ance  Co.  108  Ala.  180;  Henderson  vs.  Western  Ins.  Co.  10 
Rob.  [La.]  164;  Malin  vs.  Mercantile  Town  Mut.  Ins.  Co.  105 
Mo.  App.  625.)  Richards  on  Ins. 

There  is  on  record  a  foreign  case  where  a  piece  of 
jewelry  was  accidentally  knocked  from  a  mantelpiece  into  the 
fire  below  and  it  was  held  to  be  a  direct  loss  by  fire.  (Paris 
Law  Courts,  22  Irish  Laws  and  Solicitors,  Jl.  169).  It  is 
submitted  that  this  ruling  is  unsound.  It  is  true  the  fall  of 
the  jewelry  was  accidental,  and  it  dropped  into  a  place  where 
it  was  not  intended  to  be.  The  fire,  however,  was  not  acci¬ 
dental,  and  remained  where  it  was  voluntarily  placed.  It 
was  a  friendly  fire  performing  its  duty  as  such,  and  it  did  not 
become  any  the  less  friendly  or  acquire  any  of  the  elements 
of  a  hostile  fire  because  a  piece  of  more  than  ordinarily  ex¬ 
pensive  and  less  combustible  fuel  was  added  to  the  flames. 
No  independent  hostile  fire  was  created,  any  more  than  one 
would  be  by  the  throwing  into  the  grate  of  another  piece  of 
wood  or  shovelful  of  coal.  The  fire  itself  must  be  accidental 
in  order  to  bring  the  loss  within  the  protection  of  the  policy. 

Some  analogy  may  be  drawn  between  those  cases  where 
jewelry  and  other  articles  fall  or  are  inadvertently  thrown 
into  a  grate  or  furnace,  and  the  familiar  and  frequent  ones 
where  clothing  falls  upon  a  red  hot  stove,  or  where  a  lace 
curtain  blows  or  is  pushed  against  a  gas  jet.  The  analogy 
is  slight  and  ends  with  the  accidental  nature  of  the  contact. 
When  the  clothing  touches  the  stove,  or  the  curtain  the  gas 
jet,  another  fire  is  started,  entirely  independent  of  that  in  the 
stove  or  the  gas  burner.  The  second  fire  thus  created  is  hos¬ 
tile,  and  not  being  confined  to  the  limits  within  which  fire 
is  intended  to  be,  the  loss  is  one  for  which  the  insurer  is  liable. 

Where  the  heat  from  escaping  steam  is  so  great  as  to 
cause  charring,  but  without  ignition,  there  is  no  loss  within 


4 


the  meaning  of  the  policy.  (Gibbons  vs.  German  Ins.  &  Sav. 
Inst.  30  Ill.  App.  263).  Although  certain  chemical  actions 
may  correspond  in  their  effects  to  fire,  they  do  not  constitute 
fire  unless  they  result  in  actual  ignition.  Mere  combustion  will 
not  support  a  claim  for  loss  by  fire,  unless  it  is  sufficiently 
rapid  to  produce  ignition.  (Western  Woolen  Mills  Co.  vs. 
Northern  Assurance  Co.  139  Fed.  637;  72  U.  S.  C.  C.  A.  1).  i 
Although  lightning  may  be  a  form  of  fire,  loss  caused  by 
lightning,  without  actual  ignition,  is  not  in  the  ordinary 
meaning  of  the  words,  a  loss  by  fire ;  but  a  “lightning  clause” 
may  be,  and  usually  is,  attached  to  the  policy. 

The  ablest  and  most  interesting  exposition  of  the  question 
as  to  what  is  meant  by  “fire”  within  the  meaning  of  a  con¬ 
tract  of  fire  insurance  is  that  contained  in  the  opinion  of  the 
United  States  Circuit  Court  of  Appeals,  8th  Circuit,  in  the 
case  of  Western  Woolen  Mills  Co.  vs.  Northern  Assurance 
Co.  139  Fed.  Rep.  637,  82  U.  S.  C.  C.  A.  p.  1  which  may 
be  briefly  stated  as  follows :  A  large  quantity  of  wool  in 
fleeces  was  submerged  for  eight  days  during  a  flood,  which 
caused  spontaneous  combustion,  with  smoke,  steam  and  great 
heat  by  which  the  wool  was  damaged  and  its  fibre  destroyed. 

The  building  did  not  burn,  nor  did  any  part  of  it.  The  wool 
was  spread  to  dry  and  was  stirred  with  pitchforks  day  and 
night,  as  it  was  too  hot  for  handling,  though  not  hot  enough 
to  blister  one’s  hands.  The  wool  was  at  all  times  wet,  but 
at  no  time  was  there  any  visible  evidence  of  what  is  popu¬ 
larly  known  as  fire. 

The  Court  said,  “Spontaneous  combustion  is  usually  a 
rapid  oxidation.  Fire  is  oxidation  which  is  so  rapid  as  to 
either  produce  flame  or  a  glow.  Fire  is  always  caused  by 
combustion,  but  combustion  does  not  always  cause  fire.  The 
word  “spontaneous”  refers  to  the  origin  of  the  combustion. 

It  means  the  internal  development  of  heat  without  the  action 
of  an  external  agent.  Combustion  or  spontaneous  combus¬ 
tion  may  be  so  rapid  as  to  produce  fire,  but  until  it  does  so, 
combustion  cannot  be  said  to  be  fire.” 

“No  definition  of  fire  can  be  found  that  does  not  include 
the  idea  of  visible  heat  or  light,  and  this  is  also  the  popular 
meaning  of  the  word.  The  slow  decomposition  of  animal  and 
vegetable  matter  in  the  air  is  caused  by  combustion.  Com¬ 
bustion  keeps  up  the  animal  heat  in  the  body.  It  causes  the 
wheat  to  heat  in  the  bin  and  in  the  stack.  It  causes  hay  in 
the  stack  and  in  the  mow  of  the  barn  to  heat  and  decompose. 

It  causes  the  sound  tree  of  the  forest,  when  thrown  to  the 
ground,  in  the  course  of  years  to  decay  and  molder  away 
until  it  becomes  again  a  part  of  Mother  Earth.  Still  we 
never  speak  of  these  processes  as  fire.  And  why?  Because 
the  process  of  oxidation  is  so  slow  that  it  does  not  produce 
a  flame  or  glow.”  Held  that  the  loss  was  not  the  result  of 
fire  within  the  meaning  of  the  contract. 


5 


The  above  opinion  was  rendered  by  one  of  the  highest 
courts  in  the  land,  after  a  careful  study  and  consideration 
of  the  testimony  of  a  large  number  of  scientific  experts,  yet 
a  Kansas  judge  in  another  case  in  the  State  Court  growing 
out  of  the  same  fire,  had  such  an  exalted  opinion  of  the 
intelligence  of  a  Kansas  jury  that  he  deemed  it  unnecessary 
to  give  any  definition  of  what  constitutes  “fire,”  and  the 
jury,  as  was  to  be  expected,  proceeded  to  show  its  entire 
ignorance  of  the  subject  by  rendering  the  customary  insur¬ 
ance  verdict,  which  the  divided  higher  court,  in  a  semi- 
apologetic  opinion,  refused  to  disturb.  (Western  Woolen 
Mills  Co.  vs.  Sun  Insurance  Office,  72  Kan.  48;  82  Pac.  Rep. 
513). 

In  a  case  where  the  building  was  heated  by  steam,  which 
by  the  breaking  of  a  pipe  escaped  into  a  room,  damaging 
books  and  furniture  and  causing  such  intense  heat  as  to  result 
in  charring  and  otherwise  severely  damaging  the  contents 
of  the  room,  the  Illinois  Appellate  Court  said:  “Fire  and  heat 
are  not  one,  but  cause  and  effect.  Damage  by  heat  is  not 
insured  against  in  terms,  and  is  covered  by  the  policy  only 
where  the  misplaced  fire  causes  it.  If  fire  were  a  moral  agent, 
no  blame  could  be  imputed  to  it.  It  was  doing  its  duty,  and 
nothing  more.  The  damage  was  caused  by  another  agent, 
who,  undertaking  to  transmit  the  beneficial  influence  of  the 
fire,  broke  down  in  the  task.  The  common  understanding  of 
the  word  “fire”  would  never  include  heat,  short  of  the  degree 
of  ignition.”  (Gibbons  vs.  German  Ins.  &  Sav.  Inst.  30 
Ill.  App.  263). 

Perhaps  the  most  famous  and  the  most  frequently  quoted 
decision  bearing  on  this  subject  is  that  in  the  English  case 
of  Austin  vs.  Drewe,  decided  in  1816  (4  Campbell  360;  6 
Trant  436).  The  property  covered  was  the  stock  and  utensils 
in  a  sugar  house.  The  building  was  eight  stories  in  height, 
and  in  each  story  sugar,  in  a  certain  stage  of  preparation, 
was  deposited  for  the  purpose  of  being  refined ;  this  required 
a  certain  degree  of  heat,  and  this  was  communicated  to  each 
story  by  a  chimney  running  up  through  the  whole  building 
and  forming  almost  one  side  thereof.  At  the  top  of  the  chim¬ 
ney,  above  the  eight  stories,  was  a  register,  which  the  plain¬ 
tiffs  used  to  shut  at  night  in  order  to  retain  in  the  chimney 
and  building  all  the  heat  they  could.  One  morning  a  servant 
neglected  to  open  the  register,  and  shortly  afterward  it 
was  discovered  that  sparks  and  smoke  had  gotten  into  the 
rooms ;  that  heat  had  slightly  blistered  the  walls  and  acci¬ 
dentally  discolored  and  damaged  the  sugars.  There  was  no 
fire  in  the  building  that  ought  not  to  be  there ;  nothing  was 
on  fire  that  ought  not  to  be  on  fire ;  the  damage  was  occa¬ 
sioned  by  sparks,  heat  and  smoke.  The  jury  found  for  the 
defendant,  and  the  verdict  was  sustained  on  appeal,  the  Court 
holding  that  the  loss  was  occasioned  by  the  unskillful  manage¬ 
ment  of  the  machinery  and  register  by  the  plaintiff’s  own 


6 


servants ;  that  it  was  not  caused  by  fire  within  the  meaning  of 
the  policy,  and  the  insurer  was  not  liable. 

The  smoking  lamp  figures  quite  extensively  in  the  exper¬ 
ience  of  every  fire  insurance  adjuster,  but  all  the  decisions 
which  have  been  rendered  in  cases  of  this  nature  are  in  favor 
of  the  insurer.  Two  cases  which  may  be  mentioned  as  directly 
in  point  are  Fitzgerald  vs.  German  Amer.  Ins.  Co.  (62  N.  Y. 
Supp.  824 ;  30  N.  Y.  Misc.  72)  and  Samuels  vs.  Continental 
Ins.  Co.  (2  Pa.  Dist.  Ct.  397).  The  former  was  an  ordinary 
smoking  lamp  damage,  tliere  being  no  fire  outside  the  lamp 
itself.  In  reversing  a  judgment  for  the  plaintiff  the  Court 
said :  “The  rule  seems  to  be  that  where  the  insured  employs, 
fire  for  economic  or  scientific  purposes,  and  the  fire  is  con¬ 
fined  to  the  agencies  so  employed,  and  damage  ensues,  with¬ 
out  any  actual  ignition  to  the  property  insured,  the  insurance 
company  is  not  liable.”  The  latter  case  was  an  extraordinary 
smoking  lamp  damage,  the  flame  having  risen  two  or  three 
feet  above  the  chimney,  but  it  ignited  nothing  outside  of  the 
lamp.  Held,  that  the  insurer  was  not  liable. 

This  doctrine  is  eminently  sound,  and  if  it  were  other¬ 
wise,  there  would  be  no  escape  from  liability  on  the  part 
of  insurance  companies,  for  the  expenses  of  redecorating  tens 
of  thousands  of  ceilings  in  dwelling  houses  alone  which  are 
blackened  or  otherwise  discolored  each  year  by  smoking  gas 
jets,  which  expenses  would  almost,  if  not  entirely,  absorb  the 
modest  premiums  collected  on  that  class  of  property. 

In  Massachusetts,  claim  was  made  for  damage  to  walls 
and  furnishings  by  smoke  from  burning  soot  in  a  chimney. 
There  was  no  fire  except  in  the  stove  and  in  the  chimney. 
The  Court  seems  to  have  had  some  difficulty  in  reaching  a 
conclusion,  but  finally  decided,  and  rightly,  that  the  blaze  in 
the  chimney  was  a  hostile  fire  independent  of  the  friendly  fire 
in  the  stove,  and  that  the  insurer  was  liable,  using  the  fol¬ 
lowing  language :  “A  chimney  is  not  intended  to  be  used 
as  a  place  in  which  to  kindle  fires.  It  is  intended  to  carry 
off  the  products  of  combustion.  We ,  are  inclined  to  the 
opinion  that  a  distinction  should  be  made  between  a  fire  inten¬ 
tionally  lighted  and  maintained  for  a  useful  purpose  in  con¬ 
nection  with  the  occupation  of  a  building,  and  a  fire  which 
starts  from  such  a  fire  without  human  agency,  in  a  place  where 
fires  are  never  lighted  nor  maintained,  although  such  ignition 
may  naturally  be  expected  to  occur  as  an  incident  to  the 
maintenance  of  necessary  fire,  and  although  the  place  where 
it  occurs  is  constructed  with  a  view  to  prevent  damage  from 
such  ignition.”  (Wav  vs.  Abingdon  Mut.  Fire  Ins.  Co.  166 
Mass.  67;  43  N.  E.  1032). 

By  parity  of  reasoning,  although  the  insurer  would  not 
be  liable  for  loss  caused  by  smoke  and  soot  from  a  lamp  or 
an  oil  stove,  so  long  as  the  flame  is  confined  to  the  wick,  no 
matter  to  what  height  it  may  extend,  yet  if  it  gets  outside  of 
the  wick  and  envelopes  the  lamp  or  stove  itself,  the  insurer 


7 


would  be  liable  for  the  ensuing  loss,  for  the  reason  that  the 
fire  then  gets  outside  of  the  place  where  it  is  intentionally 
lighted,  loses  its  friendly  nature  and  becomes  hostile. 

A  case  bearing  directly  on  this  point  is  that  of  Collins  vs. 
Delaware  Ins.  Co.  (9  Pa.  Super.  Ct.  576).  The  damage  was 
caused  by  fire  in  an  oil  stove,  and  it  was  left  to  the  jury  to 
determine  from  the  conflicting  testimony  whether  the  fire'  was 
confined  to  the  wick  or  spread  to  the  oil  reservoir.  The  ver¬ 
dict  was  for  the  plaintiff,  the  Court  having  charged  the  jury 
that  if  the  loss  was  due  to  smoke  or  heat  caused  by  fire  while 
in  its  proper  place  in  the  stove,  the  insurer  would  not  be 
liable,  but  that  if  the  loss  was  caused  by  a  fire  outside  its 
prope'r  place  they  should  find  for  the  plaintiff. 

A  case  differing  in  an  essential  particular  from  that  of 
Way  vs.  Abingdon  Mut.  Fire  Ins.  Co.  (supra),  but  possessing 
some  points  in  common,  is  that  of  Cannon  vs.  Phoenix  Ins.  Co. 
(110  Ga.  562).  The  policy  covered  on  a  stock  of  dry  goods, 
hats  and  clothing.  A  stovepipe  became  disconnected  at  the 
ceiling,  and  when  a  fire  was  built  in  the  stove,  the  smoke  and 
soot  damaged  the  goods  in  the  upper  story  to  the  extent  of 
several  thousand  dollars.  Water  was  used  quite  freely  to 
<cool  the  ceiling,  but  there  was  no  evidence  that  there  was  any 
fire  except  in  the  stove  where  it  was  intended  to  be.  Held, 
that  the  insurer  was  not  liable. 

The  insurer  is  not  liable  for  damage  caused  by  an  ex¬ 
ploding  steam  boiler,  where  there  was  no  fire  except  under 
the  boiler;  nor  for  damage  to  a  boiler  by  overheating  from 
regular  furnace  fires,  owing  to  the  absence  of  water  in  the 
Toiler.  (Millandon  vs.  New  Orleans  Ins.  Co.  4  La.  Amn.  15; 
American  Towing  Co.  vs.  German  Fire  Ins.  Co.  74  Md.  25; 
21  Atl.  553). 

Recently,  in  Pennsylvania,  a  large  manufacturing  con¬ 
cern  after  having  its  furnace  cleaned,  had  kindling  placed 
therein  preparatory  to  getting  up  steam  when  the  factory 
opened  for  business  the  following  morning.  The  water  had 
been  drawn  off  from  the  boiler,  and  the  manhole  left  open. 
It  was  claimed  that  a  stranger,  or  some  one  who  had  no 
right  to  do  so,  set  fire  to  the  kindling,  which  resulted  in  a 
damage  of  several  hundred  dollars  to  the  boiler  and  setting. 
The  claim,  rightly  or  wrongly,  was  allowed  on  the  theory 
that  with  respect  to  the  insured  the  fire  was  hostile,  for  the 
reason  that  although  a  furnace  is  ordinarly  intended  to  hold 
fire,  it  is  not  intended  that  a  fire  which  needs  watching  should 
be  lighted  indiscriminately  by  strangers  at  any  time,  and 
certainly  not  irrespective  of  conditions.  If  this  fire  had  been 
lighted  by  the'  insured  or  any  one  of  his  employees  while 
acting  within  the  scope  of  his  authority,  the  claim  would 
not  have  been  recognized,  notwithstanding  the  fact  that  the 
boiler  was  not  in  condition  to  withstand  the  effects  of  the  fire. 

A  decision  directly  in  point  (not  yet  reported)  has  just 
been  handed  down  by  the  Supreme  Court  of  Kansas  in  the 


8 


case  of  McGraw,  Trustee,  vs.  Home  Insurance  Company.  It 
was  alleged  that  some  unknown  person  gained  entrance  to 
the  laundry,  drained  the  boiler,  turned  on  the  natural  gas, 
kept  the  fire  going  until  the  boiler  was  destroyed  and  then 
turned  off  the  gas  and  retired  from  the  building.  The  court 
while  admitting  that  under  such  a  state  of  facts  the  fire 
would  doubtless  be  regarded  as  hostile  and  the  insurer  held 
liable,  concluded  that  the  theory  advanced  presented  features 
of  such  inherent  improbability  that  it  ought  not  to  be  adopted 
except  upon  evidence  tending  to  exclude  any  more  reasonable 
hypothesis.  As  no  such  evidence  was  presented  the  court 
decided  that  an  inference  of  malicious  injury  by  an  outsider 
was  not  fairly  deducible,  and  held  that  the  insurer  was  not 
liable. 

Where  the  insured  places  anything  on  a  stove  for  the 
purpose  of  cooking*,  heating  or  warming,  and  the  stove  be¬ 
comes  overheated,  causing  the  article  to  become  charred  and 
give  off  an  oily  or  greasy  smoke  which  damages  the  building 
and  contents,  it  has  been  held  that  the  insurer  is  not  liable. 

There  is  but  one  discordant  note  to  mar  the  harmony 
of  these  decisions,  and  that  comes  from  Wisconsin.  A  servant 
built  a  fire  in  the  furnace  with  paper  and  cannel  coal,  not  used 
or  intended  to  be  used  for  such  purpose,  and  in  a  short  time 
the  fire,  which  was  confined  to  the  furnace,  became  so  violent 
as  to  fill  the  house  with  smoke,  soot  and  intense  heat,  result¬ 
ing  in  a  damage  of  several  hundred  dollars  to  the  property. 
The  Wisconsin  Supreme  Court,  one  justice  dissenting,  held 
that  the  fire  was  extraordinary  and  unusual,  unsuitable  for 
the  purpose  intended,  and  in  a  measure  uncontrollable,  besides 
being  inherently  dangerous  because  of  the  material  used.  The 
fire  was  accordingly  declared  hostile  within  the  contempla¬ 
tion  of  the  policy,  and  the  insurer  held  liable.  (O’Connor  vs. 
Queen  Ins.  Co.  140  Wis.  388). 

This  is  the  only  court  which  has  varied  from  the  time- 
honored  principle  that  the  insurer  is  not  liable  for  loss  caused 
by  a  so-called  friendly  fire.  There  was  a  strong  dissenting 
opinion,  but  the  fire  in  the  furnace  was  so  unusual  and  the 
heat  so  intense  that  the  majority  of  the  court  could  not, 
apparently,  refrain  from  arguing  itself  into  the  belief  that 
it  had  lost  its  friendly  nature  and  should  be  regarded  as 
hostile. 

Singularly  enough,  no  claim  for  loss  by  heat  or  smoke 
from  a  bonfire  has  ever  been  before  the  courts  for  adjudication, 
probably  because  losses  of  this  nature  are  usually  small.  The 
word  “bonfire,”  viewed  in  the  light  of  its  possible  etymo¬ 
logical  significance,  seems  friendly,  but  whether  it  be  derived 
from  the  French  or  not — and  this  is  open  to  question — a  bon¬ 
fire  is  anything  but  a  good  fire.  Inasmuch,  however,  as  the 
civil  authorities,  fire  departments,  property  owners  and  the 
long  suffering  community  make  no  objection  to  these  fires 
being  kindled,  and  put  forth  no  effort  to  extinguish  them, 


9 


this  may  be  taken  as  presumptive  evidence  that  they  are 
looked  upon  by  the  public  generally  as  friendly,  and  it  would 
certainly  seem  that  they  should  be'  so  regarded,  at  least  with 
respect  to  those  who  intentionally  light  them,  if  not  with 
respect  to  others. 

Although  the  insured  must  show  that  he  has  sustained  a 
loss  by  fire  within  the  meaning  of  the  policy  before  he  can 
recover  against  the  insurers,  it  is  not  necessary  for  him  to 
show  that  the  property  injured  has  actually  been  burned  by 
the  fire.  It  is  sufficient  if  he  proves  that  the  fire  was  the 
proximate,  that  is,  the'  dominant,  efficient  cause  of  the  loss. 
For  example,  the  insurer  is  liable  for  damage  by  smoke,  by 
water  used  to  extinguish  the  fire,  by  the  operations  of  fire¬ 
men  and  others,  by  falling  walls,  by  exposure  during  the 
fire,  or  by  reasonable  removal ;  also  damage  by  explosion 
when  explosion  is  caused  by  fire ;  also  loss  by  theft,  or  injury 
caused  by  intentional  blowing  up  of  building  by  the  civil 
authorities  to  prevent  the  spread  of  a  conflagration,  unless 
there  are  express  stipulations  to  the  contrary  in  the  policy. 

Damage  caused  by  a  fire  engine  on  its  way  to  a  fire  is 
not  a  loss  coming  under  the  protection  of  the  policy  (Foster 
vs.  Fidelity  Ins.  Co.  24  Pa.  S.  Ct.  585)  ;  nor  damage  caused 
by  a  fire  department  which  breaks  into  a  building  under  the 
mistaken  assumption  that  a  fire  is  in  progress ;  but  losses 
of  the  latter  description  are  usually  small  and  there  is  a  gen¬ 
eral  inclination  on  the  part  of  the  insurers  to  give  them  favor¬ 
able'  consideration. 

An  explosion  caused  bv  an  explosive  substance  such  as 
gunpowder  coming  into  contact  with  fire,  is  strictly  speaking, 
a  fire  of  inconceivable  rapidity,  though  it  can  hardly  be  con¬ 
sidered  fire  in  the  popular  sense.  But  many  of  the  older 
decisions  held  that  the  ignition  of  gunpowder  constitutes 
fire  within  the  meaning  of  a  policy  of  fire  insurance,  and 
doubtless  on  account  of  these  decisions  the  insurers  inserted 
the  condition  exempting  themselves  from  liability  for  loss 
caused  by  the  explosion  of  gunpowder,  camphene,  or  any  ex¬ 
plosive  substance,  and  later  the  clause  as  it  appears  in  the 
standard  policy,  which  expressly  declares  that  the  company 
shall  not  be  liable  for  explosion  of  any  kind  unless  fire  ensues, 
and  in  that  event,  for  the'  damage  by  fire  only. 

The  most  famous  among  the  older  cases  bearing  on  this 
subject  is  that  of  Scripture  vs.  Lowell  Mut.  Fire  Ins.  Co. 
decided  in  1852,  10  Cush.  (Mass.)  356;  57  Am.  Dec.  111. 
The  tenant’s  minor  son  carried  a  cask  of  gunpowder  into  the 
attic  of  the  building  without  plaintiff’s  consent,  and  fired  it 
with  a  match.  The  gunpowder  exploded,  set  fire  to  a  bed 
and  clothing,  charred  and  stained,  some  woodwork  and  blew 
off  the  roof  of  the  house.  The  Court  held  that  the  entire 
damage  by  combustion  and  explosion  was  covered  by  the 
policy. 


10 


The  question  as  to  what  is  the  legal  test  of  the  existence 
of  casual  relation  is  one  concerning  which  there  is  a  great 
diversity  of  opinion.  Philosophers,  metaphysicians  and 
logicians  for  centuries  have  busied  themselves  with  the  sub¬ 
ject;  the  philosophers  and  logicians  differ  with  the  jurists,  and 
the  jurists  differ  with  each  other;  and  in  no  branch  of  busi¬ 
ness  have  we  more  striking  or  more  interesting  illustrations 
than  in  that  of  fire  insurance. 

From  the  numerous  definitions  of  proximate  cause  which 
have  been  given,  the  following  is  taken  from  an  opinion 
rendered  by  our  highest  court:  “The  question  is  not  what 
cause  was  nearest  in  time  or  place  to  the  catastrophe.  That 
is  not  the  meaning  of  the  maxim,  causa  proxima  non  remota 
spectatur.  The  proximate1  cause  is  the  efficient  cause,  the  one 
that  necessarily  sets  the  other  causes  in  operation.  The 
causes  that  are  merely  incidental  or  instruments  of  a  superior 
or  controlling  agency  are  not  the  proximate  causes  and  the 
responsible  one's,  though  they  may  be  nearer  in  time  to  the 
result.  It  is  only  when  the  causes  are  independent  of  each 
other  that  the  nearest  is,  of  course,  to  be  charged  with  the 
disaster.”  (The  G.  R.  Booth,  171  U.  S.  450). 

One  of  the  most  celebrated  cases,  outside  of  insurance, 
involving  the  question  of  proximate  and  remote  cause,  is 
one  recorded  in  Blackstone'  (2  Wm.  Blackstone  893;  3  Wilson 
403)  which  is  familiar  to  all  law  students,  that  of  Scott  vs. 
Shepherd,  familiarly  known  as  the  “Squib  case.”  Black¬ 
stone  dissented  and  the  majority  of  the  Court  reached  their 
conclusions  along  different  lines  of  reasoning.  The  defend¬ 
ant,  a  lad,  threw  a  lighted  squib  or  serpent  made  of  gun¬ 
powder,  from  the  street  into  the  market  house,  where'  a  large 
concourse  of  people  were  assembled.  The  lighted  squib  fell 
upon  the  stand  of  one  Yates,  where  ginger  bread,  cakes  and 
pies  were  sold.  To  prevent  injury  to  himself  and  the  wares  of 
Yates,  one  Willis  instantly  took  up  the  squib  from  the  stand 
and  threw  it  across  the  market  house,  when  it  fell  upon 
another  stand  of  one'  Ryal,  who  sold  the  same  sort  of  wares. 
Ryal  instantly  took  up  the  squib  to  save  his  own  goods  and 
threw  it  into  another  part  of  the  market  house.  In  its  pas¬ 
sage  it  struck  the  plaintiff  in  the  face,  and  bursting,  put  out 
one  of  his  eyes.  A  recovery  of  £100  by  the  plaintiff  was  sus¬ 
tained  by  the  English  Court  of  Common  Pleas. 

This  seemingly  far  fetched  though  perhaps  logical  de¬ 
cision  has  a  parallel  in  a  well  known  insurance  case,  to  wit : 
Lvnn  Gas  &  Electric  Co.  vs.  Meriden  Fire  Ins.  Co.  158  Mass. 
570,  33  N.  E.  690,  29  L.  R.  A.  297,  35  Am.  St.  R.  540.  A  fire 
occurred  in  the  tower  of  a  building  through  which  electric 
light  wires  were  carried.  The  fire  was  confined  to  the  tower, 
and  the  damage  there  was  slight,  but  it  caused  a  short  circuit 
which  resulted  in  bringing  into  the  dynamo  below  an  increase 
of  electric  current.  This  caused  a  greater  resistance  to  the 
machinery,  which  was  transmitted  to  a  pulley  through  a  belt 


11 


so  that  the  shock  destroyed  the  pulley.  By  the  destruction 
of  that  pulley  the  main  shaft  was  disturbed  and  the  succeeding 
pulleys  up  to  the  jack  pulley  were  ruptured.  By  reason  of 
pieces  flying  from  the  jack  pulley,  or  from  some  other  cause, 
the  fly  wheel  of  the  engine  was  destroyed,  the  governor 
broken,  and  everything  crushed.  This  general  disruption 
occurred  in  a  part  of  the  building  remote  from  any  fire  and 
the  Court  held  that  the  whole  loss  was  by  fire  within  the 
meaning  of  a  Massachusetts  standard  policy. 

Both  of  the  foregoing  decisions  are  in  quite  striking 
contrast  to  that  rendered  by  the  New  York  Court  of  Appeals 
in  the  familiar  case  of  Ryan  vs.  New  York  Central  &  Hudson 
River  R.  R.  Co.,  35  N.  Y.  210  (1866),  which  is  very  frequently 
referred  to,  and  in  not  particularly  complimentary  terms,  in 
connection  with  the  question  of  proximate  and  remote  cause. 
The  Court,  actuated  to  a  great  extent,  apparently,  by  con¬ 
siderations  of  public  policy,  ruled  in  substance  that  recovery 
could  be  had  from  the  Railroad  Company  only  for  the  burn¬ 
ing  of  the  first  building  ignited,  and  that  it  made  no  differ¬ 
ence  that  the  burning  of  the  second  building  was  a  probable 
consequence  of  the  burning  of  the  first.  This  view,  which  is 
unsound  in  principle,  and  which  is  opposed  to  an  overwhelm¬ 
ing  weight  of  authority,  has  been  somewhat  modified  in  later 
decisions  by  the  Court  of  Appeals.  Hoffman  vs.  King,  53 
N.  E.  401 ;  Webb  vs.  R.  R.  49  N.  Y.  420. 

The  same  strong  inclination  on  the  part  of  New  York’s 
highest  Court  to  discover  some  new  and  wholly  independent 
cause  intervening  between  the  original  cause  and  the  ultimate 
effect,  as  revealed  in  the  above  cases,  is  apparent  in  the  cele¬ 
brated  insurance  case  of  Hustace  vs.  Phenix  Ins.  Co.,  175 
N.  Y.  292,  67  N.  E.  592,  where  the  loss  was  caused  solely  by 
concussion  due  to  an  explosion  from  a  hostile  fire  in  the 
Tarrant  Building,  fifty-six  feet  and  eleven  inches  distant,  and 
separated  from  it  by  two  buildings  and  an  alleyway.  The 
Court  of  Appeals  in  this  case,  one  Justice  dissenting,  reversed 
the  unanimous  decision  of  the  court  below  and  held  that  the 
loss  was  not  by  fire  but  by  explosion,  and  that  the  insurer 
was  not  liable. 

This  decision  has  been  quite  severely  criticised,  but  it 
seems  to  be  in  entire  harmony  with  those  in  other  states  where 
similar  conditions  have  been  under  consideration ;  in  fact  there 
does  not  appear  to  be  a  single  case  of  concussion  damage  on 
record  where  the  insurer  has  been  held  liable  under  the  stand¬ 
ard  policy  or  under  any  policy  containing  the  explosion 
exemption  clause. 

But,  in  a  case  decided  by  the  United  States  Supreme 
Court  (Insurance  Co.  vs.  Tweed,  7  Wall  [U.  S.]  44),  an  ex¬ 
plosion  occurred  in  a  certain  warehouse.  The  fire  which  fol¬ 
lowed  crossed  the  street  and  communicated  to  a  mill,  and  from 
there  to  the  warehouse  containing  the  property  of  the  plaintiff. 
The  Court  held  that  there  was  no  intervening  cause ;  that  the 


12 


71 


explosion  was  the  proximate  cause  of  the  loss,  and  as  the 
policy  contained  the  explosion  exemption  clause  the  insurer 
was  not  liable.  It  may  have  been  on  account  of  this  decision 
by  our  highest  court  that  the  words  “unless  fire  ensues”  were 
added  to  the  explosion  clause  in  the  modern  policy. 

There  is  some  conflict  in  the  authorities  upon  the  ques¬ 
tion  whether,  under  a  policy  phrased  like  the  New  York 
Standard,  an  explosion  occurring  during  the  progress  of  a 
fire,  should  be  treated  as  a  mere  incident  of  the  fire,  the 

^  latter  being  regarded  as  the  efficient  cause  of  the  damage,  or 

*  whether  the  explosion  should  be  considered  proximate  in 
reference  to  the'  loss  caused  thereby,  and  the  insurer  be 
exempt  from  liability  for  such  damage  by  reason  of  the 
exemption  clause  of  the  policy.  The  overwhelming  weight 
of  authority  is  to  the  effect  that  where  the  fire  occurs  in  the 
property  described  in  the  policy,  and  an  explosion  takes  place 
therein  during  the  progress  of  the  fire,  such  explosion  is  with 
respect  to  such  property  a  mere  incident  of  the  preceding  fire, 
the  latter  being  treated  as  the  efficient  cause,  and  the  whole 
loss  is  within  the  risk  assumed,  although  the  policy  in  terms 
excludes  liability  for  loss  by  explosion. 

The  undoubted  intention  of  the  underwriters  when  insert¬ 
ing  the  explosion  provision,  was  not  so  much  for  the  purpose 
of  exempting  themselves  from  liability  for  loss  by  incidental 
explosions  resulting  from  raging  conflagrations  occurring  in 
and  confined  to  the  buildings  in  which  they  originate,  where 
the  amount  of  the  explosion  damage  is  practically  indeter¬ 
minate,  but  rather  with  the  view  of  eliminating  claims  for  loss 
by  explosions  resulting  from  sparks  or  small  fires,  or  from 
causes  which  are  in  fact  unknown,  but  which  for  insurance 
purposes  are  attributed  to  fire,  as  for  instance  the  Washburn 
mill  loss  in  Minneapolis  in  1877,  and  the  recent  Wheeler  claim 
in  Buffalo  (Washburn  vs.  Insurance  Co.,  2  Fed.,  304 ;  29 
Fed.  Cas.,  308,  329.  330;  Wheeler  vs.  Phenix  Ins.  Co.,  41 
Ins.  Law  Journal,  247;  92  N.  E.  452).  In  fact,  the  inten¬ 
tion  of  the  insurers  was  to  exempt  themselves  from  liability 
for  loss  by  explosions  of  any  kind  including  those  caused  by 
fire,  as  was  correctly  stated  by  the  New  York  Court  of  Appeals 
in  its  dictum  in  the  case  of  Briggs  vs.  N.  B.  &  Mercantile 
Insurance  Co.,  53  N.  Y.  446,  and  referred  to  with  favor  by 
the  same'  Court  in  the  Hustace  case.  This  would,  of  course, 
naturally  include  within  the  exception  loss  caused  by  con- 

*  Let  us  see,  therefore,  what  value,  if  any,  remains  in  the 
explosion  exemption  clause  in  the  light  of  the  decisions 
referred  to.  If  the  loss  were  caused  by  explosion  not  preceded 
by  a  hostile  fire,  the  exception  would  be  unnecessary,  for  the 
insurer  would  not  be  liable  even  if  the  policy  did  not  contain 
such  a  provision.  It  will  not  do  to  say  that  there  is  room 
for  the  exception  because  explosions  are  frequently  produced 
by  flame,  as  by  a  lighted  match,  a  gas  jet,  burning  lamp,  fire 


13 


in  a  furnace,  and  the  like ;  in  short,  for  loss  caused  by  a 
friendly  fire,  because  the  insurer  would  not  be  liable  for  loss 
by  explosion  as  an  incident  of  such  a  fire,  any  more  than  it 
would  be  for  any  other  incidental  damage  resulting  there¬ 
from,  even  in  the  absence  of  the  exception.  Then  again, 
inasmuch  as  concussion  losses  in  neighboring  property  are 
distinguished  from  those  in  the  premises  where  the  fire  and 
explosion  originate,  it  can  be  only  on  the  theory  that  the 
concussion  of  the  air  due  to  the  explosion  is,  with  respect 
to  such  outside  property,  an  independent,  intervening  cause 
between  the  hostile  fire  and  the  final  effect,  and  if  this  be 
true,  then  the  explosion  or  concussion,  and  not  the  fire,  would 
be  the  proximate  and  efficient  cause,  and  the  insurer  would 
not  be  liable  even  if  there  were  no  exception.  The  funda¬ 
mental  principles  underlying  friendly  fires  and  proximate  and 
remote  cause  cannot  be  affected  by  the  presence  or  absence 
of  the  explosion  provision. 

There  is,  however,  an  intimation  in  the  decision  in  the 
Hustace  case  (supra)  which  was  one  involving  loss  by  con¬ 
cussion,  that  if  it  were  not  for  the  exception  there  might 
have  been  a  recovery  as  for  a  loss  by  fire,  but  this  declaration, 
if  such  it  be,  amounts  to  an  admission  that  the  explosion  or 
concussion  is  not  an  intervening  cause  but  an  inevitable  effect 
and  a  mere  incident  of  the  fire.  Can  it  be  possible  that  the 
Court  intended  to  imply  that  the  proximity  of  the  cause  can 
shift  according  to  the  presence  or  absence  of  a  stipulation  in 
the  policy  exempting  the  company  for  the  explosion  loss? 
And  yet,  the  suggestion  that  the  absence  of  the  explosion 
exemption  clause  might  have  imposed  a  liability  upon  the 
insurer,  seems  to  make  for  the  contention  that  what,  under 
a  given  set  of  circumstances,  will  be  deemed  to  be  the  proxi¬ 
mate  cause,  will  vary  with  the  introduction  or  omission  of 
a  provision  inserted  for  the  purpose  of  relieving  the  insurer 
from  liability  for  a  certain  species  of  risk  it  has  concluded 
not  to  assume.  So  much  emphasis,  however,  has  been  laid 
upon  the  exemption  provision  in  the  decisions,  as  a  possible 
controlling  factor,  that  it  is  perhaps  fortunate  for  the  insur¬ 
ers  that  they  were  not  under  the  necessity  of  relying  entirely 
upon  the  principle  of  proximate  and  remote  cause  as  a 
defense  in  this  class  of  cases. 

In  Louisiana  a  fire  broke  out  about  180  or  200  feet  dis¬ 
tant  from  the  property  of  plaintiff,  in  a  building  containing 
a  quantity  of  gunpowder,  and  in  about  thirty  minutes  the 
gunpowder  exploded.  The  explosion  produced  such  con¬ 
cussion  of  the  air  as  to  cause  a  damage  of  about  $950.00  to 
plaintiff’s  property.  The  fire  continued  in  the  town  for  forty- 
eight  hours,  but  did  not  reach  the  building  in  question,  it 
being  entirely  unharmed  except  by  the  concussion.  The 
court  which  discussed  the  question  at  considerable  length  and 
apparently  based  its  conclusion  upon  the  supposed  intent 
of  the  contracting  parties,  in  the  course  of  its  remarks  said: 


14 


“Perhaps  after  all,  it  might  be'  safe  here,  as  in  other  contracts, 
to  inquire  whether  the  loss  was  within  the  reasonable  intend¬ 
ment  of  the  parties  when  they  made  the  contract.  Did  they 
intend  by  an  insurance  against  fire  to  cover  losses  arising 
from  the  concussion  of  the  air  produced  by  an  explosion  of 
gunpowder  upon  the  premises  of  other  persons  than  the 
insured?  We  think  such  an  extraordinary  result  could  not 
have  been  contemplated  by  the  parties.  We  do  not  think 
insurance  companies  can  be  considered  responsible  for  the 
consequences  of  the  combustion  of  gunpowder,  unless  that 
combustion  has  happened  in  the  premises  insured,  or  the  gun¬ 
powder  is  itself,  with  other  merchandise,  covered  by  the 
policy.”  (Caballero  vs.  Home  Ins.  Co.,  15  La.  Ann.  517.) 

In  Mitchell  vs.  Potomac  Ins.  Co.  183  U.  S.  42 ;  22  Sup. 
Ct.  22 ;  46  L.  Ed.  74,  plaintiffs  clerk  went  down  into  the 
cellar  of  the  store,  which  was  occupied  for  the  sale  of  stoves 
and  tinware.  He  lit  a  match  because  it  was  dark,  and  the 
lighted  match  came  in  contact  with  the  vapor  of  gasoline  kept 
in  the  cellar,  and  a  violent  explosion  at  once  followed,  causing 
a  collapse  of  the  building.  It  will  be  observed  that  this  was 
a  friendly  fire,  and  the  Court  held  that  the  loss  was  by  ex¬ 
plosion,  and  that  the  insured  could  not  recover. 

Where  an  explosion  was  produced  by  the  lighting  of  a 
match  in  a  basement  filled  with  illuminating  gas,  and  goods 
covered  by  the  policy  were  damaged,  but  not  by  burning, 
and  where  an  inflammable  and  explosive  vapor  evolved  in  the 
course  of  the  process  of  extracting  oil  from  shoddy  after¬ 
ward  exploded,  causing  considerable  damage,  it  was  held  that 
the  insurers  were  not  liable.  (Heuer  vs.  N.  W.  Nat.  Ins.  Co. 
144  Ills.  393;  Stanley  vs.  Western  Ins.  Co.  3  L.  R.  Ex.  71). 

In  an  English  case  where  there  was  no  exception  in  the 
policy,  it  was  held  that  no  liability  attached  where  it  appeared 
that  the  damage  which  occurred  to  the  premises  was  occa¬ 
sioned  by  a  concussion  of  a  large  quantitv  of  gunpowder  at 
a  magazine  about  half  a  mile  distant.  (Everett  vs.  London 
Assurance  Corp.  115  E.  C.  19  C.  B.  [N._  S.]  126). 

In  a  case  where  the  plaintiff’s  premises  adjoined  a  mill 
which  took  fire  and  shortly  after  exploded,  blowing  the 
plaintiff’s  house  off  its  foundation  and  almost  ruining  it,  it 
was  held  that  insurer  was  not  liable.  (Miller  vs.  London  & 
Lancashire  Ins.  Co.  41,  Ill.  App.  395). 

In  German  Fire  Co.  vs.  Roost,  decided  by  the  Supreme 
Court  of  Ohio  (26  Ins.  Law  Journal,  699)  the  plaintiff’s 
policy  contained  the  usual  explosion  clause,  and  also  a  special 
clause  insuring  against  any  loss  or  damage  caused  by  light¬ 
ning.  A  powder  house  situated  across  the  street  seventy- 
one  feet  away,  was  struck  by  lightning;  an  explosion  occurred 
and  plaintiff’s  house  was  destroyed  by  the  concussion.  It 
was  held  that  the  plaintiff  could  not  recover ;  and  the  Court 
said :  “In  no  case  which  has  come  within  our  observation — 
and  we  have  examined  a  great  many — has  a  liability  been 

15 


l 


found  to  attach  where  there  was  a  provision  excluding  liability 
for  loss  by  explosion  and  the  loss  was  caused  by  fire,  or 
as  here,  by  lightning  taking  effect  in  a  distant  building,  and 
the  damage  being  wrought  to  the  insured  property  by  an  ex¬ 
plosion  produced  by  the  fire  or  the  lightning  without  either 
of  the  latter  agencies  coming  in  contact  with  the  insured 
property.” 

In  Hall  &  Hawkins  vs.  National  Fire  Ins.  Co.  Tenn. 
(35  Ins.  Law  Journal  507)  a  fire  occurred  in  a  hardware  store 
in  Knoxville,  Tenn.,  and  ignited  powder  stored  therein.  A 
tremendous  explosion  followed,  shaking  the  whole  city  and 
the  country  for  miles  around.  The  resultant  concussion  dam¬ 
aged  plaintiff’s  stock  contained  in  a  building  between  thirty 
and  forty  feet  distant,  to  the  extent  of  several  thousand 
dollars.  Held  that  the  insurer  was  not  liable. 

The  English  decisions  are  in  accord  with  the  American 
decision  in  respect  of  these  concussion  damages,  and  although 
they  may  seem  to  be  in  conflict  with  the  oft  quoted  first 
Baconian  maxim,  it  is  evident  that  the  line  must  be  drawn 
somewhere,  otherwise,  as  was  said  by  Ryles,  J.,  in  an  English 
case  (Everett  vs.  London  Assurance  Co.,  19  C.  B.  [N.  S.] 
126)  if  a  ship  was  in  the  neighborhood  of  Etna  or  Vesu¬ 
vius  and  was  shaken  by  an  eruption,  that  would  be  a  damage 
by  fire ;  or  if  a  gun  were  fired  off,  loaded  with  small  shot, 
among  crockery,  that  would  be  a  damage  by  fire ;  or  it 
might  be  said  that  if  the  heat  of  the  sun  were  too  great,  that 
would  be  a  damage  by  fire. 

Where  an  adjoining  building  burned,  and  as  the  result 
of  fire  a  party  wall  fell  and  carried  with  it  the  partition  wall 
and  part  of  the  building  covered  by  the  insurance,  it  was 
held  to  be  a  direct  loss  by  fire.  (Ermentrout  vs.  Girard  F.  & 
M.  Ins.  Co.  63  Minn.  305;  65  N.  W.  635). 

Where  a  building  was  destroyed  by  fire,  leaving  some  of 
the  walls  standing,  and  two  days  thereafter  one  of  the  walls 
fell,  damaging  the  building  covered  by  the  insurance,  it  was 
held  to  be  a  loss  within  the  policy.  (Scottish  Court  of  Ses¬ 
sions  7,  Cases  in  Ct.  of  Sessions  52,  1  Bennett  259). 

Where,  for  a  week  after  a  fire  a  high  wind  prevailed  and 
on  the  seventh  day,  while  a  wind  amounting  to  a  gale  was 
blowing,  a  high  wall  belonging  to  the  burned  building  fell 
over  on  the  adjoining  building,  crushing  its  roof  and  doing 
considerable  damage,  the  Court  sustained  the  finding  of  the 
jury  that  fire  was  the  proximate  cause  of  the  loss,  and  there¬ 
fore  covered  by  the  policy.  (Russell  vs.  German  Fire  Ins. 
Co.  [Minn.]  1907;  111  N.  W.  400). 

It  is  suggested,  however,  that  in  cases  of  this  character 
the  right  of  subrogation  might  be  of  value  to  the  insurer 
against  the  owner  of  a  building  who  permits  the  walls  to 
remain  standing  for  an  unreasonable  time  without  taking 
proper  precautions  to  prevent  their  falling. 


16 


But  in  a  Georgia  case  it  was  held  that  damage  to  office 
fixtures  resulting  from  the  fall  of  the  building  twenty-five 
days  after  the  fire  was  not  covered,  the  building  having  in  the 
meantime  been  repaired,  and  heavy  rains  having  fallen  which 
tended  to  weaken  the  structure.  (Cuesta  vs.  Royal  Ins.  Co. 
98  Ga.  72,  27  S.  E.  172). 

In  the  absence  of  a  stipulation  in  the  policy  to  the  con¬ 
trary,  the  insurer  would  be  liable  for  loss  caused  by  the 
destruction  of  property  by  the  order  of  civil  authorities  to 
prevent  the  spread  of  a  conflagration,  and  the  point  is  well 
argued  in  City  Fire  Ins.  Co.  vs.  Corlies  20  Wend.  (N.  Y.)  367. 
The  standard  policy,  however,  contains  a  special  provision 
covering  this  contingency,  which  was  no  doubt  prompted  by 
this  and  kindred  decisions. 

The  weight  of  the  decisions  is  in  favor  of  the  doctrine 
that  not  only  loss  by  removal  but  also  for  the  expense  of 
removal  is  a  direct  loss  by  fire,  whether  the  building  contain¬ 
ing  the  goods  be  actually  on  fire  or  in  imminent  danger  of 
burning,  even  without  any  special  provision  in  the  policy. 
Some  doubt,  however,  has  been  expressed  with  respect  to 
the  item  of  expense  unless  liability  therefor  is  specifically 
assumed. 

In  the  absence  of  conditions  to  the  contrary,  the  insurer 
under  a  fire  insurance  policy  is  liable  for  goods  stolen  during 
a  fire,  but  the  standard  policy  and  others  in  current  use  con¬ 
tain  an  express  provision  exempting  the  insurance  company 
from  such  liability. 

It  has  been  suggested  that  the  condition  making  the  policy 
void  if  the  insured  neglects  to  use  all  reasonable  means  to 
preserve  the  property  at  and  after  a  fire,  or  when  the  prop¬ 
erty  is  endangered  by  fire  in  neighboring  premises,  and  the 
condition  exempting  the  insurer  from  liability  for  loss  by 
theft,  are  inconsistent  with  each  other  and  that  the  latter 
should  therefore  not  be  enforceable. 

In  support  of  this  view  the  argument  is  advanced  that 
the  effect  of  these  two  clauses  is  to  subject  the  property  to 
a  risk  against  which  the  insured  has  no  protection ;  that  if 
the  property  is  negligently  lost  by  theft  no  clause  is  neces¬ 
sary  ;  and  as  property  is  quite  likely  to  be  stolen  if  removed 
from  a  building,  the  more  effectually  the  insured  complies 
with  the'  conditions  of  the  contract,  the  more  effectually  he 
diminishes  his  own  security.  But  a  Missouri  court  which  held 
the  insurer  liable  for  loss  by  theft  when  the  policy  contained 
no  exemption  provision,  sustained  the  validity  of  the  provision 
in  another  case,  and  in  a  most  remarkable  decision  brushed 
aside  all  arguments  directed  against  the  alleged  inconsist¬ 
ency  in  the  two  conditions.  (Webb  vs.  Protection  &  Aetna 
Ins.  Co.’s  14  Mo.  3 ;  3  Bennett  509 ;  Newmark  vs.  L.  &  L.  & 
G.  Ins.  Co.  30  Mo.  160;  4  Bennett  464). 


17 


Eminent  authorities,  however,  hold  that  the  insurer  is 
not  liable  under  the  New  York  standard  policy  either  for 
the  expense  of  putting  out  a  fire  or  of  protecting  the  prop¬ 
erty  at  and  after  a  fire,  and  there  are  several  decisions  sup¬ 
porting  this  view.  (Hebner  vs.  Palatine  Ins.  Co.  157  Ill.  144— 
152;  Wells  vs.  Boston  Ins.  Co.,  6  Pick.  [Mass.]  182;  Ralli 
vs.  Troop,  157  U.  S.  386-405). 

Except  where  it  is  otherwise  specifically  provided,  the 
insurer  will  not  be  liable  for  consequential  damages,  such  as 
loss  of  the  use  of  a  store  or  factory,  loss  of  rents,  the  inci¬ 
dental  loss  of  trade  and  consequent  loss  of  prospective  profit, 
these  being  regarded  as  too  remote,  and  not  supposed  to  enter 
into  the  calculation  of  the  contracting  parties.  Thus  a  policy 
on  a  bridge  does  not  cover  incidental  loss  of  tolls  from  the 
adjacent  turnpike  belonging  to  plaintiffs.  (Farmers  Ins.  Co. 
vs.  New  Holland  Turnpike  Co.  122  Pa.  37,  15  Atl.  563. 
Niagara  Fire  Ins.  Co.  vs.  Heflin,  22  Ky.  L.  Rep.  1212,  60  S.  W. 
393.  Hayes  vs.  Ins.  Co.,  170  Mass.  492,  49  N.  E.  754.  Niblo  vs. 
Ins.  Co.,  1  Sandf.  [N.  Y.]  551.)  The  standard  policy  contains 
a  condition  expressly  disclaiming  liability,  unless  specifically 
assumed,  for  loss  occasioned  “by  interruption  of  business, 
manufacturing  processes  or  otherwise.”  Losses  of  this 
nature,  however,  are  taken  care  of  by  special  contracts  in  the 
shape  of  rent,  profit  and  use  and  occupancy  insurance,  which 
class  in  recent  years  has  assumed  quite  large  proportions. 

In  the  absence  of  an  exemption  provision  in  the  policy, 
it  has  been  held  that  the  insurer  is  liable  for  any  loss  which 
may  accrue  to  the  insured  by  reason  of  any  ordinance  or 
law  regulating  the  construction  or  repair  of  buildings  ;  hence, 
where  a  city  ordinance  will  not  allow  a  building  that  has  been 
damaged  by  fire  to  be  repaired,  the  insurer  is  liable  for  the 
entire  value  of  the  building,  less  whatever  value  remains  over 
the  expense  of  removing  it ;  or,  where  the  building  may  be 
repaired,  and  the  ordinance  requires  changes  either  of  a 
minor  or  radical  character  to  be  made,  the  insurer  is  liable  for 
the  additional  expense  rendered  necessary  by  these  changes, 
unless  such  liability  is  expressly  disclaimed  in  the  contract. 

The  proposition  is  fully  discussed  in  a  decision  rendered 
by  the  Supreme  Judicial  Court  of  Massachusetts  in  the  case 
of  Hewins  et  al.  vs.  Insurance  Company.  Under  a  Massachu¬ 
setts  standard  policy  which  contains  no  exemption  stipulation, 
the  insurer  was  held  liable,  but  under  a  New  York  standard 
policy  which  was  involved  in  the  same  litigation  and  which 
contains  an  exemption  provision,  liability  was  limited  to  the 
amount  needed  to  restore  the  building  to  its  original  condi¬ 
tion.  (Hewins  vs.  London  Assurance  Corp.,  184  Mass.,  178; 
68  N.  E.,  62  Cf.  Brady  vs.  Insurance  Co.,  11  Mich.,  425; 
Monteleone  vs.  Royal  Ins.  Co.,  47  La.  Ann.  1563;  Hamburg 
Bremen  Ins.  Co.  vs.  Garlington,  66  Tex.,  103 ;  Larkin  vs. 
Glens  Falls  Ins.  Co.,  80  Minn.,  527 ;  Penn.  Co.  vs.  Phil.  Con- 
tributionship  201  Pa.,  497). 


18 


The  Standard  Policy  Law  of  Massachusetts  does  not,  ap¬ 
parently,  preclude  the  insurer  from  stipulating  against  such 
liability,  and  during  the  past  year  a  clause  has  been  adopted 
in  Boston  expressly  disclaiming  liability,  unless  specifically 
assumed,  beyond  the  actual  value  of  the  property  described, 
at  the  time  the  loss  occurs,  or  beyond  what  it  would  then 
cost  the  insured  to  repair  or  restore  it  to  the  condition  in 
which  it  was  immediately  before  the  loss  occurred.  And  if 
the  insured  desires  protection  against  the  demolition  and  in¬ 
creased  cost  of  construction,  it  can  be  secured  by  having  a  rider 
covering  this  feature  attached  to  the  policy,  in  consideration 
of  an  additional  premium. 

The  question  as  to  what  is  a  consequential  loss  is  one 
not  entirely  free'  from  difficulty.  It  arises  most  frequently 
in  connection  with  breweries,  packing  houses  and  cold  stor¬ 
age  plants.  Where  the  cooling  apparatus  is  located  in  the 
same  building  as  the  stock,  there  is  no  question  as  to  liability 
for  the  incidental  damage  to  the  latter  on  account  of  the 
interruption  of  the  process  of  refrigeration.  It  is  where  the 
stock  is  stored  in  a  building  which  depends  for  its  refrigera¬ 
tion  upon  an  ice  plant  located  in  an  adjacent  or  distant  build¬ 
ing,  that  the  question  of  liability  for  so-called  consequential 
damage  presents  itself. 

Several  years  ago,  in  a  western  city,  a  large  packing 
house,  including  the  refrigerating  plant,  was  destroyed  by 
fire.  About  one  hundred  feet  distant  from  the  ice  plant,  and 
connected  therewith  by  a  cold  air  conductor,  were  two  stor¬ 
age  warehouses,  containing  about  five  million  pounds  of 
meat.  No  fire,  smoke  or  water  entered  the  storage  buildings, 
the  only  damage  to  the  meats  therein  being  that  due  to  a  rise 
in  temperature  from  the  shutting  off  of  cold  air  from  the  ice 
plant.  The  insured  asked  the1  consent  of  the  local  representa¬ 
tives  of  the  insurance  companies  to  “handle  the  salvage,”  and 
supposing  that  reference  was  made  to  the  salvage  in  the 
packing  house  proper,  consent  was  given,  whereupon  the 
insured  took  the  entire  stock  in  the  two  warehouses,  shipped 
some  to  Boston,  some  to  Buffalo,  and  some  to  other  places, 
and  presented  a  claim  to  the  companies  for  loss  and  expenses 
incurred  of  about  $250,000.00.  The  companies  took  exception 
to  the  amount  of  the  claim,  and  demanded  an  appraisement, 
which  resulted  in  an  award  of  nearly  $50,000.00  more  than 
the  original  claim.  The'  policies  simply  covered  on  stock  in 
the  warehouses,  and  contained  no  reference  to  consequential 
loss.  This  is  probably  the  largest  loss  of  the  kind  on  record. 

There  never  has  been  any  court  decision  bearing  directly 
on  this  question,  and  when  the  above  loss  occurred,  some  in¬ 
surers,  although  willing  to  admit  that  if  the  whole  plant, 
including  the  warehouses  and  contents  had  been  written  under 
blanket  policies  for  single  premiums  the  entire  property  might 
possibly  have  been  regarded  as  one  risk,  took  the  position 
that  inasmuch  as  the  contents  of  the  warehouses  were  written 

19 


1| 


under  specific  policies  which  had  no  connection  with  the  gen¬ 
eral  insurance  covering  the  packing  house  plant,  no  liability 
existed  for  damage  to  the  stock  caused  by  the  rise  in  tempera¬ 
ture.  If  the  case  could  have  been  tried  unaffected  by  the 
element  of  waiver,  the  court  would  no  doubt  have  inquired, 
as  in  other  contracts,  whether  the  loss  was  within  the  reason¬ 
able  intendment  of  the  parties. 

If,  as  has  uniformly  been  held,  damage  to  adjacent  prop¬ 
erty  by  explosion  caused  by  fire,  is  regarded  as  too  remote  to 
come  within  the  protection  of  the  policy,  it  is  not  clear  why 
the  same  reasoning*  does  not  apply,  with  equal  force,  to 
damage  by  rise  in  temperature  caused  by  fire  in  a  neighboring 
building.  If  the  loss  is  not  regarded  as  the  inevitable  physical 
effect  of  the  fire,  in  one  case,  it  is  not  easy  to  perceive  why  it 
should  be  in  the'  other.  And  as  a  matter  of  principle,  it  should 
make  no  difference  whether  all  the  buildings  are  owned  by 
one  man,  or  whether  there  are  separate  ownerships. 

In  order  to  guard  against  any  question  arising  in  case 
of  loss  on  this  class  of  property,  policies  are  now  written 
expressly  disclaiming  liability  for  consequential  loss,  and  if 
the  insured  desires  insurance  of  this  nature,  he  can  secure  it 
by  taking  out  a  separate  policy  covering  such  risk,  or  by 
having  an  endorsement  made  on  his  policy  and  paying  an 
additional  premium  therefor. 

Let  us  hear  the  conclusion  of  the  whole  matter.  Within 
the  meaning  of  an  ordinary  policy  of  insurance  the  word 
“fire”  must  be  construed  in  its  ordinary  popular  sense’,  and 
not  be  given  such  technical  or  restricted  meaning  as  might 
be  applied  to  it  upon  scientific  analysis.  There  must  be  some¬ 
thing  besides  mere  combustion ;  the  element  of  flame  or  glow 
must  be  present.  The  fire  must  be  without  intent  on  the 
part  of  the  insured  or  his  responsible  agent  to  injure  the  prop¬ 
erty  ;  it  must  be  accidental  with  respect  to  the  insured.  If 
intentionally  kindled  for  a  useful  purpose  in  a  place  specially 
designed  or  provided,  the  fire  does  not  change  its  character 
because  the  flame  extends  unusually  high,  or  the  heat  be¬ 
comes  excessive,  or  smoke  escapes  therefrom  and  causes 
damage.  The  fire  must  be  hostile  as  distinguished  from  what 
is  universally  regarded  as  friendly,  and  it  must  be  the  proxi¬ 
mate  and  not  the  remote  cause  of  the  loss. 

If  the  hostile  fire  causes  an  explosion,  the  fire  is  held  to 
be  the  efficient  cause  of  the  whole  loss  which  ensues  in  the 
premises  where  it  originates  when  its  effects  are  produced  in 
direct  sequence,  though  one  of  the  incidents  of  the  sequence 
may  be  an  explosion,  on  the  theory  that  it  could  not  have  been 
intended  to  nullify  such  predominant  cause  by  the  explosion 
exemption  provision. 

If  as  the  result  of  a  hostile  fire  the  concussion  of  the  air 
causes  damage  to  neighboring  property,  the  explosion  or 
concussion,  and  not  the  fire,  is  held  to  be  the  proximate  cause 


20 


of  the  loss.  If  a  friendly  fire  causes  an  explosion,  none  of  the 
damage  resulting  can  be  regarded  as  a  loss  by  fire. 

There  are  probably  some  phases  of  this  question  which 
have  not  been  touched  upon,  and  new  conditions  will  no 
doubt  arise  to  tax  the  ingenuity  of  the  layman,  the  lawyer, 
and  the  jurist,  but  a  careful  study  of  the  text  writers,  and  an 
analysis  of  the  decisions  all  tend  to  confirm  and  emphasize 
the  correctness  of  the  propositions  laid  down  in  the  beginning 
of  this  address,  and  to  demonstrate  that  they  are  funda- 
|  mentally  sound. 


21 


Is  a  Policy  Divisible? 

A  LECTURE 


REPRINTED  FROM  THE  INSURANCE  MONITOR  OF 

FEBRUARY,  1913 


BY 

W.  N.  BAMENT 


General  Adjuster 


THE  HOME  INSURANCE  COMPANY 

NEW  YORK 


. 

■ 


■ 


' 


. 


■ 


Is  a  Policy  Divisible? 


There  is  probably  no  question  arising  under  the  fire  insur¬ 
ance  contract,  concerning  which  there  is  such  diversity  of 
opinion,  as  that  bearing  on  the  subject  of  the  divisibility  or 
indivisibility  of  the  policy. 

Prior  to  the  adopton  of  the  New  York  Standard  Policy 
twenty-five  years  ago,  although  there  was  more  or  less  con¬ 
flict  among  the  authorities,  which  in  point  of  number  were 
almost  equally  divided,  the  better  opinion  was  that  the  con¬ 
tract  was  severable ;  that  is,  where  it  covered  several  different 
classes  or  items  of  property  for  separate  amounts,  either  at 
separate  rates  or  for  gross  premium,  it  might  be  void  as  to 
one  or  more  items  on  account  of  breach  of  conditions  and 
valid  as  to  others. 

It  was  no  doubt  on  account  of  these  varying  decisions 
that  the  framers  of  the  Standard  Policy,  actuated  by  the  com¬ 
mendable  desire  of  making  the  meaning  so  clear  that  a  way¬ 
faring  court  need  not  err  therein,  but  by  the  less  commend¬ 
able  desire  of  making  the  contract  indivisible  irrespective  of 
conditions,  inserted  in  line  seven  (7)  the  words  :  “This  entire 
policy  shall  be  void  ...”  and  they  evidently  thought 
they  had  thereby  precluded  all  possibility  of  its  being  con¬ 
strued  otherwise  than  as  an  entire  indivisible  contract. 

It  is  interesting  to  note,  however,  that  even  under  the 
old  forms,  which  did  not  contain  the  word  “entire,”  some 
courts  held  firmly  to  the  doctrine  of  entirety,  while  others, 
under  the  Standard  Form,  by  reason  of  the  insertion  of  the 
word  “entire,”  became  converts  to  the  principle  of  entirety, 
while  still  others  continued  to  decide  in  favor  of  divisibility 
despite  the  phraseology  “This  entire  policy  shall  be  void.” 

The  question  in  one  form  or  another  has  been  before  the 
courts  many  times,  and  the  decisions  which  have  been  ren¬ 
dered  by  the  highest  tribunals  of  more  than  three-fourths 
of  the  states  may,  in  general,  be  classified  as  follows;  to  wit: 

First :  That  the  policy  is  divisible,  even  though  the 

risk  may  be  entire. 


1 


Second :  That  the  policy  is  entire,  even  though  the 

risk  may  be  divisible. 

Third :  That  where  the  risk  is  divisible,  the  policy 

is  divisible. 

Although  the  decisions  in  some  of  the  states  have  not 
been  uniformly  consistent,  the  following  may  be  taken  as  a 
fairly  accurate  classification  of  the  attitude  of  the  courts  on 
the  question : 

Those  in  favor  of  divisibility  are  New  York,  Kentucky, 
Kansas,  Nebraska,  Illinois,  Missouri,  Alabama,  Colorado,  West 
Virginia,  Mississippi,  Oklahoma,  Delaware,  Montana,  North 
Dakota  and  South  Dakota.  In  the  last  three  states  the  ques¬ 
tion  is  regulated  by  statute  under  certain  conditions. 

Those  in  favor  of  entirety  are  Georgia,.  Massachusetts, 
Maine,  Pennsylvania,  Ohio,  Tennessee,  Louisiana,  Connecti¬ 
cut,  Maryland,  Minnesota,  New  Jersey,  North  Carolina,  Rhode 
Island,  Arkansas,  District  of  Columbia  and  United  States 
Circuit  Court  of  Appeals. 

Those  in  favor  of  entirety,  only  when  the  risk  is  entire, 
are  Washington,  Michigan,  Iowa,  Indiana  and  Virginia. 

New  Hampshire  and  Vermont  may  be  placed  in  the 
doubtful  column.  The  earlier  Texas  cases  favored  divisi¬ 
bility,  the  later  ones  favor  conditional  entirety. 

In  the  above  classification,  those  states  favoring  divisi¬ 
bility  have  decided  unqualifiedly  in  favor  of  that  doctrine 
under  all  conditions  except  fraud.  A  few  of  those  favoring 
entirety  have  declared  unqualifiedly  in  favor  of  that  principle. 
In  many  of  the  cases  decided,  however,  the  risks  were  entire 
and  some  of  the  courts  were,  doubtless,  influenced  by  that 
fact  in  rendering  their  decisions  in  favor  of  entirety.  It  is 
highly  probable  that  if  called  upon  to  decide  cases  where  the 
risks  are  divisible,  some  of  those  states,  which  in  the  above 
classification  have  been  placed  in  the  “entirety”  column,  will 
be  transferred  to  the  list  of  those  favoring  conditional  divis¬ 
ibility. 

Many  of  the  courts  which  have  held  the  policy  to  be 
entire,  have  based  their  decisions  upon  the  rule  appertaining 
to  contracts  generally,  that  entirety  of  consideration  renders 
the  contract  entire,  and  this  has  been  regarded  by  them  as 
the  controlling  factor,  irrespective  of  the  phrase  “This  entire 
policy  shall  be  void,”  .... 

Others,  on  the  contrary,  do  not  regard  this  as  controlling, 
but  argue  that  premiums  are  not  fixed  at  an  arbitrary  lump 
sum,  but  are  ascertained  by  applying  definitely  fixed  rates 
to  the  amounts  insured,  and  adding  together  the  amount  re¬ 
quired  for  each  separate  risk ;  hence,  to  say  that  the  premium 
-or  consideration  is  indivisible  is  a  legal  fiction,  for  it  is  just 
as  easy  to  divide  as  it  was  originally  to  compute  it.  The 
premium  might  well  be  stated  separately,  but  for  conven¬ 
ience,  the  amount  thereof  is  stated  in  a  gross  sum. 


2 


In  these  days  as  many  as  five  hundred  separately  valued 
items  are  sometimes  included  under  the  cover  of  a  single 
policy,  and  hundreds  of  policies  are  written  every  day  cov¬ 
ering  specifically  no  less  than  one  hundred  different  items. 
Yet,  if  any  one  of  these,  no  matter  how  small,  or  how  far 
removed  from  the  other  items  described,  proves  to  be  a  build¬ 
ing  on  ground  not  owned  by  the  insured  in  fee  simple,  or 
be  personal  property,  and  be  or  become  encumbered  by  a  chat¬ 
tel  mortgage,  without  consent  thereto  being  endorsed  on  the 
policy,  the  entire  contract,  according  to  the  view  of  the 
strict  constructionists,  is  void,  and  the  loss  on  the  items  not 
directly  involved  in  the  breach,  is  uncollectible. 

Some  courts  have  apparently  felt  that  it  is  unreasonable 
to  suppose  that  the  Legislatures  which  adopted  the  Standard 
Policy,  or  the  parties  themselves,  should  intend  to  avoid  the 
entire  contract  for  some  trifling  mistake  relating  perhaps  to 
only  one  of  many  items,  possibly  geographically  independent 
of  each  other,  and  have,  therefore,  practically  ignored  the 
word  “entire”  in  their  endeavor  £o  give  effect  to  the  main 
purpose  of  the  policy.  Others,  however,  have  adhered  to 
a  literal  construction  and  have  virtually  ruled  that  the  words, 
“this  entire  policy”  mean  one  thing  only  and  cannot  possibly 
mean  anything  else. 

If  an  insurance  company  should  be  small  enough  to  deny 
all  liability  under  a  policy  containing  fifty  different  items, 
simply  because  a  condition  had  been  violated  in  respect 
of  one  item  differently  located,  it  would  be  interesting  to 
observe  whether  those  courts  which  seem  to  be  committed 
to  the  doctrine  of  unqualified  entirety,  would  be  great  enough 
to  stand  by  their  principles  and  grant  a  forfeiture  as  to  all 
items ;  and,  if  not,  what  avenue  of  escape  they  would  find. 

It  is  true  that  overinsurance  on  stock  will  affect  the 
building  containing  it  as  well  as  the  stock  itself ;  that  the 
undesirability  of  a  risk  on  a  building  on  leased  ground,  with 
a  short  time  to  run  and  without  the  privilege  of  renewal, 
will  apply  with  equal  force  to  the  stock  and  fixtures  therein, 
and  that  a  chattel  mortgage  on  stock  or  fixtures  which  in¬ 
creases  the  risk  thereon,  also  increases  the  risk  on  the  build¬ 
ing  in  which  they  are  contained.  And  these  considerations 
probably  had  no  little  to  do  with  the  insertion  of  the  word 
“entire”  in  the  Standard  Policy. 

These  are  undoubtedly  strong  points  in  favor  of  con¬ 
ditional  entirety ;  that  is,  if  the  breach  as  to  one  item  or 
class  increases  the  risk  on  the  rest,  the  policy  should  be 
altogether  avoided.  But  they  do  not  constitute  any  argument 
whatever  in  favor  of  unconditional  entirety  of  contract  and 
no  ethical  argument  can  be  advanced  in  favor  of  that  doc¬ 
trine.  The  advocates  of  the  extreme  view  of  entirety  under 
all  conditions,  have  nothing  to  stand  upon  except  “entirety 
of  consideration,”  and  the  phrase  “this  entire  policy  shall  be 
void”  .  .  .  But  these  considerations  appear  to  have  been 


3 


quite  sufficient,  according  to  the  view  of  those  courts  which 
have  adhered  to  that  doctrine. 

There  are  a  number  of  points  that  may  be  urged  against 
both  the  principle  of  unqualified  entirety  and  conditional  en¬ 
tirety  and  in  favor  of  absolute  divisibility. 

In  the  first  place,  the  insured  can,  except  in  rare  in¬ 
stances,  for  the  asking,  secure  a  policy  on  each  item,  such  as 
building,  machinery  and  stock,  for  the  same  aggregate  pre¬ 
mium  that  he  would  have  to  pay  for  a  single  policy  embracing 
all  the  items  with  separate  amounts  on  each.  The  minds  of  ( 

the  insurer  and  the  insured  meet  upon  the  rate  or  rates,  and 
the  amounts  to  apply  to  each  item,  and  all  the  insurances 
contracted  for  are  written  on  one  piece  of  paper  familiarly 
known  as  a  policy,  and  is  accepted  by  the  insured.  If  he  or 
his  broker  requests  separate  policies  for  each  separately  valued 
item,  he  can  get  them,  but  because  he  does  not  subject  the 
underwriter  to  this  trouble  and  as  a  matter  of  convenience 
principally  to  the  latter,  he  accepts  one  document  including  all 
the  items,  it  is  submitted  that  this  mere  circumstance  should 
nuot  place  the  insured  in  any  less  advantageous  position  than 
he  would  have  occupied  if  he  had  asked  for  separate  policies. 

Then  again,  what  has  been  and  what  is  the  daily  prac¬ 
tice  of  insurance  companies  with  respect  to  this  question  of 
divisibility  ?  The  contribution  clause  providing  for  the  ap¬ 
portionment  of  loss  among  the  various  insurance  companies 
interested,  has  been  in  general  use  for  nearly  a  century,  and 
has  always  read  substantially  the  same  as  in  the  New  York 
Standard  Policy : 

‘This  Company  shall  not  be  liable  under  this  policy 
for  a  greater  proportion  of  any  loss  on  the  described 
property,”  .  .  .  “than  the  amount  hereby  insured 

shall  bear  to  the  whole  insurance”  .  .  “covering  such 

property.”  (Lines  96-98.) 

It  says  “this  policy ”  and  “ amount  hereby  insured.”  It  does 
not  say  “This  company  shall  not  be  liable  for  a  greater  pro¬ 
portion  of  any  loss  on  the  property  described  in  each  item  of 
this  policy,  than  the  amount  hereby  insured  on  each  item  shall 
bear  to  the  whole  insurance  on  each  item  respectively ;”  yet,  no 
court  decision  involving  the  question  of  apportionment  has 
ever  been  rendered,  and  no  loss  among  the  millions  that  have 
occurred  since  the  contribution  clause  came  into  use,  has  been 
apportioned  between  companies,  except  on  the  basis  of  each  * 

separately  valued  item  being  treated  as  a  separate  policy. 

Thus,  in  construing  the  contribution  clause,  the  policy  has 
been  and  is  universally  recognized  by  the  courts  and  the  entire 
insurance  fraternity  as  divisible. 

This  is  also  true  in  respect  of  the  cancellation  clause — 

“This  policy  shall  be  cancelled  at  any  time”  .  .  . 

Thousands  of  policies  are  cancelled  every  year,  not  only 
as  to  one  or  more  separate  items,  but  policies  covering  one 


4 


item  only  are  cancelled  in  part  and  a  ratable  portion  of  the 
premium  is  returned  to  the  insured.  Thus  for  many  years 
we  have  had  another  recognition  of  the  principle  of  divisibility 
on  the  part  of  insurance  companies  in  their  daily  practice,  and 
this  recognition  has  not  stopped  at  items  but  has  even  been 
extended  to  parts  of  items. 

It  is  no  doubt  true,  as  indicated  by  text  writers,  that  the 
request  or  notice  of  cancellation  must  contemplate  an  absolute 
termination  of  the  entire  contract,  not  a  reduction  of  its 
amount,  inasmuch  as  the  terms  of  the  cancellation  clause 
offer  no  option  to  either  party  to  cancel  in  part.  If  so, 
legal  cancellation  in  part  cannot  be  effected  except  by  mutual 
agreement. 

It  goes  without  saying  that  no  insurance  company  de¬ 
siring  to  relieve  itself  of  liability  would  care  to  take  any 
chances  as  to  the  legality  of  the  cancellation  by  having  the 
notice  relate  to  one  or  more  items  of  the  policy  only,  but 
would  have  it  embrace  the  entire  contract. 

The  cancellation  clause  in  respect  of  the  right  to  cancel, 
is,  of  course,  alike  applicable  to  the  insurer  and  the  insured ; 
but  if  the  insured — who  is  less  conservative  than  the  insu¬ 
rance  companies — should  desire  to  cancel  one  or  more  items 
of  a  general  form,  or  should  insist  upon  canceling  only  the 
stock  item  of  a  policy  covering  specifically  on  building  and 
stock,  it  would  not  be  at  all  surprising  if,  in  those  states 
which  have  declared  unqualifiedly  that  the  policy  is  divisible, 
the  court  would  permit  partial  cancellation,  notwithstanding 
the  fact  that  the  cancellation  clause  refers  to  ‘‘this  policy,” 
and  also  provides  for  surrender  upon  payment  of  the  unearned 
premium.  In  fact,  it  is  difficult  to  perceive  why  the  words 
“this  policy,”  should  be  given  any  different  interpretation 
when  construing  the  cancellation  clause  than  it  is  when  in¬ 
terpreting  the  contribution  clause. 

If  the  theory  as  to  the  indivisibility  of  the  premium  be 
incorrect,  and  if  the  principle  that  two  or  more  separately 
valued  insurances,  evidenced  by  one  piece  of  paper,  are  sev¬ 
erable,  be  sound,  the  fundamental  principle  is  not  affected  by 
the  word  “entire,”  as  used  in  the  clause  declaring  the  “entire 
policy”  void,  and  it  applies  only  to  that  insurance  or  to  that 
portion  of  the  policy  as  to  which  the  breach  has  occurred. 

The  following  is  a  brief  summary  showing  the  conflicting 
views  of  different  tribunals  on  various  phases  of  the  question : 

ALABAMA. — A  mortgage  on  pool  tables  does  not  avoid 
the  policy  as  to  other  contents  of  the  building.  Violation  of 
iron-safe  clause  voids  policy  as  to  stock,  but  not  as  to  build¬ 
ing. 

CONNECTICUT. — The  risk  on  contents  might  be  in¬ 
creased  by  sale  of  the  building ;  held,  that  breach  as  to  build¬ 
ing  avoids  as  to  contents  also. 


5 


DISTRICT  OF  COLUMBIA. — A  chattel  mortgage  on 
part  of  household  effects  avoids  the  entire  policy :  Decision 
governed  by  the  word  “entire.” 

COLORADO. — Notwithstanding  the  word  “entire,”  held, 
that  policy  is  not  avoided  as  to  the  whole  by  breach  affecting 
only  a  part  of  the  property. 

DELxAWARE. — The  statute  as  to  valuation  of  building 
held  to  be  a  quasi  penal  statute,  and  violation  thereof  by 
overinsurance  voids  policy  as  to  building  only. 

U.  S.  CIRCUIT  COURT  OF  APPEALS.— A  chattel 
mortgage  on  personal  property  avoids  policy  both  as  to 
building  and  contents. 

GEORGIA. — The  premium  being  entire,  a  breach  of 
condition  as  to  stock  avoids  policy  as  to  building  also. 

ILLINOIS. — Vacancy  of  one  house  does  not  avoid  the 
policy  as  to  another,  unless  the  risk  on  latter  is  affected. 
The  general  trend  of  Illinois  decisions  favors  divisibility. 

INDIANA. — A  policy  covering  on  house  and  barn,  held 
divisible.  Misrepresentation  regarding  one  building  will  not 
affect  recovery  on  another  building  when  insured  specifically. 
In  general,  the  Indiana  rule  is  that  if  the  various  classes  of 
property  are  so  situated  in  respect  to  each  other  as  to  con¬ 
stitute  one  risk,  the  contract  is  entire,  otherwise  not. 

IOWA. — Vacancy  as  to  house  does  not  avoid  as  to  barn. 
Chattel  mortgage  on  cattle  does  not  avoid  as  to  house  and 
furniture.  Breach  as  to  building  avoids  as  to  machinery 
therein.  The  Iowa  rule’  apparently  is  that  the  policy  is 
divisible  only  when  the  risk  is  divisible. 

KANSAS. — Notwithstanding  the  word  “entire,”  the  in¬ 
surance  on  contents  is  undisturbed  by  a  prohibited  mortgage 
on  real  estate.  Kansas  holds  that  the  premium  is  easily  ap- 
portionable. 

KENTUCKY. — Fraud  as  to  one  item  avoids  policy  as 
to  all.  Kentucky  holds  that  when  different  items  of  property 
are  separately  valued,  there  is,  in  effect,  a  separate  insurance 
on  each  particular  class  or  item  of  property  so  valued;  and 
it  logically  follows  that  what  might  affect  one  policy  of  in¬ 
surance,  would  not  necessarily  affect  the  other. 

LOUISIANA.— Breach  as  to  building  avoids  policy  as 
to  contents  also.  When  personal  property  is  contained  in 
two  different  buildings ;  held,  the  policy  is  entire. 

MAINE. — A  policy  covering  on  non-hazardous  merchan¬ 
dise  is  avoided  as  to  entire  item  by  presence  of  hazardous 
articles,  not  simply  as  to  the  hazardous  articles — governed 
by  the  fact  that  premium  is  entire.  The  general  trend  of 
Maine  decisions  is  in  favor  of  entirety. 

MARYLAND. — Prohibited  vacancy  as  to  building  also 
avoids  policy  as  to  contents.  Other  insurance  without  notice 
on  one  item  avoids  entire  contract. 


MICHIGAN. — Held ,  a  policy  covering  real  and  personal 
property  can  be  regarded  as  divisible  only  when  the  risk 
on  each  is  different. 

MINNESOTA. — A  building  on  leased  ground  without 
notice,  avoids  policy  as  to  personalty  also.  Increase  of  moral 
hazard  as  to  one  item  increases  it  as  to  both.  Fraud  as  to 
one  item  avoids  as  to  all.  In  one  case  Minnesota  adopted  the 
Texas  and  Arkansas  rule,  to  which  reference  will  be  made 
later.  The  policy  covered  a  mining  plant  consisting  of  several 
buildings,  one  of  which  was  vacant.  The  court  held  that,  as 
the  consideration  was  entire,  the  policy  must  be  regarded  as 
entire,  so  that  a  vacancy  of  one  of  the  buildings  constituting 
the  plant,  did  not  affect  the  validity  of  the  policy  as  to  either 
building. 

MISSISSIPPI. — Violation  of  iron-safe  clauses  does  not 
invalidate  policy  as  to  furniture  and  fixtures. 

MISSOURI. — Misrepresentation  as  to  one  item  does  not 
affect  other  separately  valued  items.  The  word  “entire” 
applies  only  to  the  portion  of  the  policy  affected,  and  does 
not  affect  the  character  of  the  policy  as  a  divisible  contract. 

MONTANA. — Insurance  on  building  held  undisturbed 
by  chattel  mortgage  on  contents.  The  premium  might  easily 
be  stated  separately,  and  gross  sum  is  stated  for  convenience. 

NEBRASKA. — Insurance  on  contents  is  not  disturbed 
by  alienation  of  real  estate.  The  trend  of  Nebraska  decisions 
favors  divisibility. 

NEW  JERSEY. — Breach  of  condition  as  to  building 
avoids  as  to  contents  also. 

NEW  HAMPSHIRE. — Alienation  of  one  parcel  avoids 
policy  as  to  all,  unless  the  court  can  rule  that  there  has  been 
no  increase  in  risk. 

NEW  YORK. — Under  an  old  form  of  policy  reading,  “if 
the  property  insured  or  any  part  thereof  he  encumbered  ”  it  was 
held  to  be  indivisible;  but  the  New  York  decisions  generally,’ 
and  particularly  those  under  the  Standard  Policy,  which  are 
numerous,  strongly  favor  divisibility. 

The  fact  that  the  Standard  Policy  makes  breaches  of  war¬ 
ranty  apply  to  property  generally,  and  not  to  “any  part  there¬ 
of,”  as  in  some  of  the  older  issues,  has  apparently  opened  the 
way  to  the  Court  of  Appeals  to  adhere  to  the  principle  of 
divisibility,  despite  the  words  “this  entire  policy  shall  be 
void.” 

NORTH  CAROLINA. — Violation  of  iron-safe  warranty 
which  avoids  policy  as  to  stock,  avoids  as  to  building  also. 
Breach  as  to  building  also  avoids  as  to  contents. 

NORTH  AND  SOUTH  DAKOTA.— Statutes  in  both 
states  provide  that  change  in  interest  in  one  or  more  of 
several  distinct  things  separately  covered,  does  not  avoid 
policy  as  to  others. 


7 


OKLAHOMA. — If  different  classes  of  property  are  sep¬ 
arately  valued,  the  contract  is  severable,  notwithstanding  the 
word  “entire.” 

OHIO. — This  state  switched  from  divisibility  to  entirety 
by  reason  of  the  word  “entire”  in  the  Standard  Policy,  and 
ruled  that  if  one  item  of  contents  was  not  owned  absolutely 
by  the  insured,  the  entire  policy  was  void. 

PENNSYLVANIA. — Breach  as  to  ownership  of  ma¬ 
chinery  avoids  policy  as  to  building  and  stock.  Gunpowder 
in  one  of  three  buildings,  which  endangers  all,  renders  policy 
void  as  to  all :  Governed  by  entirety  of  premium. 

RHODE  ISLAND. — Breach  as  to  ownership  of  part  of 
contents  avoids  policy  as  to  all. 

TENNESSEE. — This  state,  like  Ohio,  shifted  its  po¬ 
sition  from  that  of  divisibility  to  entirety,  by  reason  of  the 
word  “entire,”  and  held  that  fraud  as  to  one  item  avoided 
policy  as  to  all. 

VERMONT. — Where  the  insurance  company  had  a  lien 
on  real  estate  for  entire  premium,  the  court  held  that  a  pro¬ 
hibited  mortgage  on  building  also  avoided  insurance  as  to 
contents. 

WASHINGTON. — Breach  of  warranty  as  to  piano  avoids 
entire  policy  on  contents,  though  separately  valued.  If  entire 
risk  is  affected  by  the  breach,  separate  valuations  are  of  no 
effect  to  prevent  forfeiture  of  entire  policy. 

In  Washington,  the  policy  would  probably  be  held  to  be 
divisible,  provided  breach  does  not  effect  the  entire  risk. 

WEST  VIRGINIA. — This  state  comes  out  boldly  and  de¬ 
clares  that  the  general  rule  as  to  whether  a  contract  is  entire 
or  divisible,  should  not  be  applied  to  insurance  policies,  and 
prefers  to  be  guided  by  considerations  of  equity  and  reason¬ 
ableness  of  construction.  It  has  decided  in  favor  of  divisibility. 

VIRGINIA. — If  the  risk  is  severable,  the  policy  is  sev¬ 
erable. 

The  Supreme  Court  of  Arkansas  and  the  Court  of  Civil 
Appeals  of  Texas  have  turned  the  tables  on  the  underwriters 
quite  ingeniously  if  not  logically,  by  holding  that  the  breach 
of  condition  must  affect  the  entire  subject  matter,  otherwise 
no  forfeiture  at  all  will  result. 

In  McQueeny  vs.  Phoenix  Ins.  Co.,  52  Ark.  257,  it  was 
held  that  where  the  policy  covered  two  dwellings  situated 
thirty  feet  apart,  separately  valued,  vacancy  of  one  did  not 
invalidate  the  policy  as  to  either,  and  virtually  ruled  that  in 
order  to  invalidate  the  policy,  both  dwellings  must  be  vacant. 

In  case  of  Bills  vs.  Hibernia  Ins.  Co.,  87  Tex.  547,  the 
Texas  Court  of  Civil  Appeals  decided  that  where  a  policy  con¬ 
tained  the  stipulation — 


8 


“This  entire  policy  shall  be  void  if  the  subject  of 
insurance  be  a  building  on  ground  not  owned  by  the 
insured  in  fee  simple” — 

and  the  policy  covered  separate  amounts  on  building  and  ma¬ 
chinery,  the  fact  that  the  building  was  on  leased  ground  did 
not  invalidate  the  insurance  on  either  item  because  “the  sub¬ 
ject  of  insurance”  consisted  of  the  house  and  machinery. 

The  same  court  also  held  to  the  same  doctrine  in  the 
recent  case  of  Spring  Garden  Ins.  Co.  vs.  Brown.  Vol.  41 
Ins.  L.  J.,  p.  735.  The  policy  contained  the  clause. 

“This  entire  policy,  unless  otherwise  provided  by 
agreement  indorsed  hereon,  or  added  hereto,  shall  be  void, 
if  the  subject  of  insurance  be  personal  property  and  be 
or  become  encumbered  by  a  chattel  mortgage.” 

The  policy  covered  a  separate  amount  on  stock  and  a 
separate  amount  on  fixtures.  The  stock  was  encumbered  by 
a  chattel  mortgage,  and  the  Court,  following  the  decision  in 
the  Bills  case,  held  that,  as  the  “subject  of  insurance”  con¬ 
sisted  of  stock  and  fixtures  and  the  mortgage  applied  to  stock 
only,  the  policy  being  entire,  it  was  not  invalidated  as  to  either 
item. 

Conversely,  where  the  policy  contained  a  provision  that 
the  policy  should  be  void  if  the  subject  of  insurance  or  “any 
part  thereof”  was  incumbered,  the  Texas  court  held  that  the 
entire  policy  was  void,  although  only  a  portion  of  the  property 
was  incumbered.  Curlee  vs.  Texas  Home  Fire  Ins.  Co.,  31 
Tex.  Civ.  App.  471. 

The  construction  placed  upon  the  contract  in  the  Bills 
case  and  the  Brown  case,  is  not  only  a  strained  one,  but  also 
at  variance  with  the  principles  established  at  common  law. 
The  court  seems  to  have  been  influenced  by  the  fact  that  in 
the  Curlee  case  the  policy  contained  the  words  “or  any  part 
thereof,”  whereas,  in  the  Bills  and  Brown  cases  these  words 
were  omitted. 

New  York  seems  to  have  taken  the  omission  of  the  words 
“or  any  part  thereof”  as  an  excuse  for  construing  the  policy 
as  divisible.  Texas,  on  the  other  hand,  has  taken  the  omission 
as  a  basis  for  construing  it  as  entire  in  the  cases  referred  to. 

The  word  “entire”  does  not  appear  in  the  Massachusetts 
Standard  Policy ;  yet,  the  Massachusetts  court  holds  that  if 
the  premium  be  an  entire  amount,  the  contract  is  not  divisible, 
and  forfeiture  as  to  one  item  defeats  the  entire  claim.  But 
that  staunch  adherent  to  the  principle  of  entirety  has  held 
that  if  a  portion  of  the  property  is  sold  without  the  insurer’s 
consent,  that  portion  is  simply  removed  from  the  cover  of  the 
policy.  Bullman  vs.  N.  B.  &  Mercantile  Ins.  Co.,  159  Mass.  118; 
Clark  vs.  New  England  M.  F.  Ins.  Co.,  6  Cush.  (Mass.)  342. 

The  supreme  Court  of  Wisconsin,  in  the  case  of  Schu- 
mitsch  vs.  American  Ins.  Co.,  48  Wis.  26,  laid  down  the  fol¬ 
lowing  interesting  rule ;  to  wit :  Where  a  policy  covers  sev- 


9 


eral  classes  of  personal  property,  and  any  property  of  that 
description  is  subsequently  mortgaged  and  placed  in  the  build¬ 
ing  so  that  the  risk  will  attach  to  it  under  the  general  language 
used,  and  the  insured  claims  that  such  mortgaged  property  is 
covered  by  the  policy,  the  mortgage  should  be  deemed  a  breach 
of  the  conditions  of  the  policy.  If,  however,  the  insured 
should  place  subsequently  mortgaged  property  in  the  build¬ 
ing,  not  claiming  that  it  was  covered  by  the  policy,  and  other 
personal  property  in  the  building  which  was  covered  by  the 
policy  should  be  destroyed,  the  insurance  on  the  unincum¬ 
bered  property  would  not  be  affected  by  the  fact  that  the 
mortgaged  property  was  in  the  building  at  the  same  time 
and  destroyed  with  it. 

In  line  with  the  foregoing,  it  has  been  suggested  that 
if  several  classes  of  personal  property  be  covered  under  the 
general  language  of  the  policy  for  one  amount,  and  one  or 
more  classes  or  articles  be  incumbered  by  a  chattel  mortgage 
at  the  time  the  policy  is  issued,  the  insured  should  be  given 
the  option  of  eliminating  such  mortgaged  articles  from  the 
cover,  in  order  to  avoid  forfeiture  as  to  the  others. 

For  instance,  if  a  printing  press  encumbered  by  a  chattel 
mortgage  be  included  in  general  terms  in  the  machinery 
item  of  a  policy  covering  a  printing  establishment  should 
not  the  insured,  in  order  to  prevent  a  forfeiture  as  to  the 
entire  item,  be  permitted  to  say  that  it  was  not  intended 
that  the  policy  should  cover  that  particular  press  ?  This 
appeals  quite  strongly  to  our  ideas  of  equity,  as  does  also  the 
elimination  of  subsequently  acquired  mortgaged  property,  as 
distinguished  from  the  placing  of  an  incumbrance  upon  a 
portion  of  the  property  after  the  issue  of  the  policy,  but  the 
New  York  courts  have  held  that  if  there  be  not  only  a  gross 
premium,  but  also  no  separate  apportionment  of  amounts  of 
insurance,  a  breach  affecting  part  of  the  subject  matter 
avoids  the  whole  contract;  thus,  a  chattel  mortgage  on  a  part 
of  the  furniture  and  fixtures  would  forfeit  the  insurance  as 
to  the  whole  property  of  that  class,  whether  the  incumbrance 
existed  at  the  time  the  policy  was  issued,  or  attached  after 
issue.  Fitzgerald  vs.  Atlanta  Home  Ins.  Co.,  175  N.  Y.  494; 
Vucci  vs.  N.  Brit.  &  Merc.  Ins.  Co.,  88  N.  Y.  Supp.  986. 

If  any  significance  whatever  is  to  be  placed  upon  the  word 
“entire,”  it  would  surely  seem  that  the  principle  of  divisibility 
had  reached  its  limit  when  it  permits  the  division  of  the  policy 
into  its  separately  valued  items. 

The  decisions  in  the  United  States,  England  and  Canada 
appear  to  be  uniformly  in  favor  of  the  primary  rule  that  any 
fraud  on  the  part  of  the  insured,  though  relating  to  a  single 
item  of  the  subject  matter,  avoids  the  entire  policy.  The 
penalty  as  to  misrepresentation,  not  amounting  to  fraud,  how¬ 
ever,  is  not  so  severe,  and  it  affects  only  the  item  concerning 
which  it  is  made.  A  misstatement  that  the  insured  has  no 
reason  to  suspect  incendiarism,  quite  properly  voids  the  entire 


10 


contract.  Phillips  holds  to  the  doctrine  that  if  a  fact  sup¬ 
pressed  relates  only  to  a  part  of  the  goods  or  subjects  of 
insurance,  but  yet  enhances  the  risk  on  the  whole,  it  is  a 
concealment  in  respect  to  the  whole,  and  holds  conversely, 
applying  the  same  criterion,  that  if  the  suppressed  fact  does 
not  enhance  the  risk  on  the  remainder  of  the  property  or  on 
the  other  subjects  of  insurance,  it  will  remain  in  force  upon 
these.  Vol.  1,  p.  381. 

A  blanket  policy  is  generally  regarded  as  more  advan¬ 
tageous  to  the  insured  than  specific  policies,  but  a  study  of 
this  subject  would  lead  one  to  conclude  that  under  certain 
conditions  in  many  states  he  would  be  better  off  with  specific 
policies. 

Cooley,  in  his  concluding  remarks  on  this  interesting 
subject,  uses  the  following  language : 

“Though  in  some  jurisdictions  the  fact  that  the  con¬ 
sideration  for  the  policy  is  entire,  has  led  the  courts  to 
declare  the  contract  entire,  an  examination  of  the  cases 
justifies  the  statement  that  the  rule  established  by  the 
weight  of  authority  is  that,  if  the  policy  covers  separate 
classes  or  items  of  property,  separately  valued  and  in¬ 
sured  for  separate  amounts,  the  contract  is  divisible,  and 
a  breach  of  warranty  or  condition  which  affects  only  one 
of  the  classes  or  items  covered  will  not  avoid  the  insurance 
on  the  other  classes  or  items.  The  fact  that  the  policy 
contains  a  declaration  that  the  entire  policy  shall  be  void 
on  a  breach  of  condition,  does  not  change  the  rule.  Reason 
and  justice  require,  however,  that  the  rule  should  be 
modified  when  various  classes  of  property  are  so  situated 
in  respect  to  each  other  that  the  risk  is  substantially  the 
same  on  all,  and  in  such  cases  a  breach  of  condition  or 
warranty  which  increases  the  risk  on  one  class  or  item 
of  the  property  insured,  should  forfeit  the  whole  in¬ 
surance.” 

Although  admitting  the  seeming  reasonableness  of  the 
suggested  modification,  yet,  in  reaching  my  own  conclusions 
in  favor  of  unqualified  divisibility  as  to  items,  I  have  been 
largely  influenced  by  the  interpretation  which  the  insurance 
companies  themselves,  for  many  years,  have  placed  upon 
other  portions  of  the  contract  in  their  everyday  practice,  and 
also  by  the  belief  that  the  insured  should  not  suffer  by  the 
mere  fact  that  he  failed  to  insist  upon  that  which  would  have 
been  freely  granted  upon  request,  without  additional  cost. 

It  is  easy  to  understand  how  a  court  can  declare  the 
policy  to  be  entire  under  any  and  all  conditions,  and  I  realize 
that  it  is  somewhat  difficult  to  escape  from  a  strict  literal 
interpretation  of  the  contract ;  but  to  hold  that  a  policy  con¬ 
taining  several  separately  valued  items,  under  one  state  of 
facts,  is  entire,  and  under  another  state  of  facts,  is  divisible, 
is  certainly  illogical.  There  are  good  reasons,  as  has  been 
pointed  out,  for  holding  that  each  separately  valued  item  is, 


11 


in  effect,  a  separate  and  distinct  contract,  and  if  this  con¬ 
struction  is  possible  or  permissible,  each  item  is  unqualifiedly 
distinct,  and  should  be  so  construed,  irrespective  of  conditions, 
and  treated  precisely  the  same  as  if  a  separate  policy  had 
been  actually  issued  on  each  item.  A  decision  which  holds 
that  the  words  “this  entire  policy”  mean  a  certain  thing  in 
one  case,  and  something  entirely  different  in  another,  is  in¬ 
consistent  and  arbitrary.  I  can  perceive  no  logical  middle 
ground  between  absolute  entirety  and  absolute  divisibility 
of  the  contract,  and  as,  for  the  reasons  stated,  I  feel  war¬ 
ranted  in  rejecting  the  former,  notwithstanding  its  apparent 
legal  soundness,  I  am,  of  course,  under  the  necessity  of  ac¬ 
cepting  the  latter,  which  I  do  with  very  good  grace,  because 
I  believe  it  to  be  ethically  sound. 


12 


FORMS 

—  From  the  Company’s  Standpoint 


AN  ADDRESS 


DELIVERED  BEFORE 

The  Insurance  Society 

of  New  York 


February  20th,  1912 


BY 

W.  N.  BAMENT 

General  Adjuster 


(1§ 


THE  HOME  INSURANCE  COMPANY 

NEW  YORK 


# 


Forms — From  the  Company’s 

Standpoint 


By  W.  N.  Bament 


The  subject  of  insurance  forms  is  such  an  exceedingly 
broad  one,  that  it  will  be  impossible  in  an  address  such  as 
this  to  do  more  than  touch  upon  it  in  a  general  way,  and 
direct  attention  to  some  of  the  more  important  forms,  which, 
although  in  general  use,  may  possess  features  which  are  not 
fully  understood. 

The  best  form,  whether  viewed  from  the  standpoint  of 
the  insurance  company  or  the  insured,  is  a  fair  form,  one 
which  expresses  in  clear,  unambiguous  language  the  mutual 
intention  of  the  parties,  and  affords  no  cause  for  surprise  on 
the  part  of  either,  after  a  loss  has  occurred.  But  the  prepara¬ 
tion  of  such  a  form  is  not  always  an  easy  task,  and  it  is 
right  at  this  point  that  the  ability  of  the  broker  and  the 
underwriter  come  into  play. 

A  distinguished  Englishman  declared  that  the  English 
Constitution  was  the  greatest  production  that  had  ever  been 
conceived  by  the  brain  of  man,  but  it  was  subjected  to  the 
most  scathing  criticism  and  violent  assaults  by  Bentham,  the 
great  subversive  critic  of  English  law.  Twenty-five  years  ago 
the  New  York  Standard  Policy  was  prepared  by  the  best 
legal  and  lay  talent  in  the  insurance,  world,  and  the  greatest 
care  was  taken  to  present  not  only  a  reasonable  and  fair  form 
of  contract  between  the  insurer  and  the  insured,  but  one 
which  could  be  easily  read  and  understood. 

While  no  such  extravagant  claims  have  been  made  for 
the  Standard  Policy  as  were  made  for  the  “Matchless  Con- 

_ ,  • >>  : j  i _  _ _ _ ± .  - 3  ^ C 


maximum  of  loss  collection  with  a  minimum  of  co-insurance 
or  other  resistance  than  a  present  day  broker,  he  has  not 
yet  been  discovered. 

The  ornate  policies  in  use  thirty  years  ago,  with  no 
uniformity  in  conditions,  with  their  classification  of  hazards 
which  no  one  could  understand  and  their  fine  print  which 
few  could  read,  have  given  way  to  plainly  printed  uniform 
Standard  Policies  with  materially  simplified  conditions.  But 
the  written  portion  of  the  insurance  contract  owing  to  our 
commercial  and  industrial  growth,  instead  of  becoming  more 
simple,  has  taken  exactly  the  opposite  direction,  and  we  now 
have  covering  under  a  single  policy  or  set  of  policies,  the 
entire  property  of  a  coal  and  mining  company,  the  breweries, 
public  service  or  traction  lines  of  a  whole  city  and  the  fixed 
property,  rolling  stock  and  common  carrier  liability  of  an 
entire  railroad  system  involving  millions  of  dollars  and  con¬ 
taining  items  numbering  into  the  thousands.  This  forcibly 
illustrates  the  evolution  of  the  policy  form  since  the  issue  of 
the  first  fire  insurance  contract  by  an  American  company  one 
hundred  and  sixty  years  ago,  in  favor  of  a  gentleman  bearing 
the  familiar  name  of  John  Smith,  covering 

“500  £  on  his  dwelling  house  on  the  east  side  of  King 
Street,  between  Mulberry  and  Sassafras,  30  feet  front,  40  feet 
deep,  brick,  9-inch  party  walls,  three  stories  in  height,  plas¬ 
tered  partitions,  open  newel  bracket  stairs,  pent  houses  with 
board  ceilings,  garrets  finished,  three  stories,  painted  brick 
kitchen,  two  stories  in  height,  15  feet  9  inches  front,  19 
feet  6  inches  deep,  dresser,  shelves,  wainscot  closet  fronts, 
shingling  1-5  worn.” 

It  will  be  observed  that  in  the  matter  of  verbiage  this 
primitive  form  rivals  some  of  our  present  day  household 
furniture  forms  and  all  will  agree  that  this  particular  dwelling 
might  have  been  covered  just  as  effectually  and  identified 
quite  as  easily  without  such  an  elaborate  description. 

Any  one  who  has  an  insurable  interest  in  property  should 
be  permitted  to  have  any  form  of  contract  that  he  is  willing 
to  pay  for,  provided  it  is  not  contrary  to  law  or  against 
public  policy,  and  judging  from  a  contract  of  insurance  issued 
by  a  certain  office  not  long  ago  the  insuring  public  apparently 
has  no  difficulty  in  securing  any  kind  of  a  policy  it  may  desire 
at  any  price  it  may  be  willing  to  pay.  The  contract  in  ques¬ 
tion  was  one  for  £20,000,  covering  stock  against  loss  from 
any  cause,  except  theft  on  the  part  of  employes,  anywhere  in 
the  Western  Hemisphere,  on  land  or  water,  without  any  con¬ 
ditions,  restrictions  or  limitations  whatsoever,  written  at  less 
than  one-half  the  Exchange  rate  in  the  insured’s  place  of 
business.  An  insurance  agent  upon  being  asked  whether  he 
thought  it  was  good,  said  that  if  the  company  was  anywhere 
near  as  good  as  the  form,  it  was  all  that  could  be  desired, 
but  vouchsafed  the  opinion  that  it  looked  altogether  too  good 
to  be  good. 


In  these  days  we  frequently  find  concentrated  within  the 
walls  of  a  single  structure  one  set  of  fire  insurance  policies 
covering  on  building,  another  on  leasehold  interest,  another 
on  rents  or  rental  value — and  in  addition  to  this,  policies  for 
various  tenants  covering  stock,  fixtures,  improvements, 
profits  and  use  and  occupancy,  subject  to  the  100%  average 
or  co-insurance  clause,  to  say  nothing  of  steam  boiler,  casualty 
and  liability  insurance,  thereby  entirely  eliminating  the  ele¬ 
ment  of  personal  risk  on  the  part  of  the  owners,  and  produc¬ 
ing  a  situation  which  will  account  in  some  measure  for  the 
17,000  annual  fire  alarms  and  $15,000,000  fire  loss  in  New 
York  City ;  $230,000,000  annual  fire  loss  in  the  country  at 
large,  and  for  the  constantly  increasing  percentage  of  cases 
where  there  are  two  or  more  fires  in  the  same  building  and 
two  or  more  claims  from  the  same  claimant. 

The  most  common  and  perhaps  least  understood  phrase 
found  in  policies  of  fire  insurance  is  what  is  known  as  the 
“Commission  Clause,”  which  reads  “his  own  or  held  by  him 
in  trust  or  on  commission  or  sold  but  not  delivered”  or  “re¬ 
moved.”  This  clause  in  one  form  or  another  has  been  in  use 
for  many  years,  and  it  was  originally  the  impression  of  un¬ 
derwriters  that  owing  to  the  personal  nature  of  the  insurance 
contract  a  policy  thus  worded  would  simply  cover  the  prop¬ 
erty  of  the  insured  and  his  interest  in  the  property  of  others, 
such  as  advances  and  storage  charges,  but  the  courts  have 
disabused  their  minds  of  any  such  narrow  interpretation  and 
have  placed  such  a  liberal  construction  upon  the  words  “held 
in  trust”  that  they  may  be  justly  regarded  as  among  the 
broadest  in  the  insurance  language  and  scarcely  less  com¬ 
prehensive  than  the  familiar  term  “for  account  of  whom  it 
may  concern” ;  in  fact,  the  principles  controlling  one  phrase 
are  similar  to  those  governing  the  other. 

It  has  been  held  that  whether  a  merchant  or  bailee  has 
assumed  responsibility,  or  agreed  to  keep  the  property  cov¬ 
ered  or  whether  he  is  legally  liable  or  not,  if  his  policies 
contain  the  words  “held  in  trust,”  the  owner  may,  after  a 
fire,  by  merely  ratifying  the  insurance  of  the  bailee,  appro¬ 
priate  that  for  which  he  paid  nothing  whatever  and  may  file 
proofs  and  bring  suit  in  his  own  name  against  the  bailee’s 
insurers.  Nor  is  this  all,  for  in  some  jurisdictions,  if  the 
bailee  fails  to  include  the  loss  on  property  of  the  bailor  in 
his  claim  against  his  insurers,  or  if  he  does  include  it  and 
the  amount  of  insurance  collectible  is  less  than  the  total  loss, 
the  bailee  may  not  first  reimburse  himself  for  the  loss  on  his 
own  goods  and  hold  the  balance  in  trust  for  the  owners,  but 
must  prorate  the  amount  actually  collected  with  those  own¬ 
ers  who  may  have  adopted  the  insurance,  although,  if  he  has 
a  lien  on  any  of  the  goods  for  charges  or  advances,  this  may 
be  deducted  from  the  proportion  of  insurance  money  due 
such  owners. 


The  phrase  “for  account  of  whom  it  may  concern”  was 
formerly  confined  almost  entirely  to  marine  insurance,  but 
in  recent  years  there  has  been  an  increasing  tendency  to  intro¬ 
duce  it  into  policies  of  fire  insurance. 

All  authorities  are  agreed  that  the  interests  protected 
by  a  policy  containing  these  words  must  have  been  within 
the  contemplation  of  him  who  took  out  the  policy  at  the  time 
it  was  issued.  It  is  not  necessary  that  he  should  have  in¬ 
tended  it  for  the  benefit  of  some  then  known  and  particular 
individuals,  but  it  would  include  such  classes  of  persons 
as  were  intended  to  be  included  and  who  these  were  may  be 
shown  by  parol.  The  owners  or  others  intended  to  be  cov¬ 
ered  may  ratify  the  insurance  after  a  loss  and  take  the  bene¬ 
fit  of  it,  though  ignorant  of  its  existence  at  the  time  of  the 
issuance  of  the  policy,  just  the  same  as  under  the  term  “held 
in  trust.” 

The  words  “for  account  of  whom  it  may  concern”  are 
not  limited  in  their  protection  to  those  persons  who  were 
concerned  at  the  time  the  insurance  was  taken  out,  but  will 
protect  those  having  an  insurable  interest  and  who  are  con¬ 
cerned  at  the  time  when  the  loss  occurs.  They  will  cover 
the  interest  of  a  subsequent  purchaser  of  a  part  or  the  whole 
of  the  property  and  supersede  the  alienation  clause  of  the 
policy  (U.  S.  S.  C.),  Hagan  and  Martin  vs.  Scottish  Union 
and  National  Ins.  Co.,  32  Ins.  Law  Journal,  p.  47;  186  U.  S. 
423). 

A  contract  of  insurance  written  in  the  name  of  “John 
Doe  &  Co.  for  account  of  whom  it  may  concern”  should 
contain  a  clause  reading  “Loss,  if  any,  to  be  adjusted  with 
and  payable  to  John  Doe  &  Co.,”  not  “loss,  if  any,  payable 
to  them”  or  “loss,  if  any,  payable  to  the  assured,”  as  forms 
sometimes  read. 

Policies  are  frequently  written  in  the  name  of  a  bailee 
covering  “On  merchandise,  his  own  and  on  the  property  of 
others  for  which  he  is  responsible,”  or  “for  which  he  may 
be  liable” — and  it  has  been  held  that 'the  effect  of  these  words 
is  to  limit  the  liability  of  the  insurer  to  the  loss  on  the 
assured’s  own  goods  and  to  his  legal  liability  for  loss  on 
goods  belonging  to  others,  but  the  words  “for  which  they 
are  or  may  be  liable”  have  been  passed  upon  by  the  Supreme 
Court  of  Illinois,  and  they  have  been  given  an  entirely  dif¬ 
ferent  interpretation.  That  tribunal  in  the  case  of  The  Home 
Insurance  Company  vs.  Peoria  &  Pekin  Union  Railway  Co. 
(28  Insurance  Law  Journal,  p.  289;  178  Ills.  64)  decided  that 
the  words  quoted  were  merely  descriptive  of  the  cars  to  be 
insured ;  that  the  word  “liable”  as  used  in  the  policy  did  not 
signify  a  perfected  or  fixed  legal  liability,  but  rather  a  con¬ 
dition  out  of  which  a  legal  liability  might  arise. 

As  illustrative  of  its  position  the  court  said  that  an 
assignor  of  a  negotiable  note  may,  with  no  incorrectness  of 
speech,  be  said  to  be  liable  upon  his  assignment,  but  his 


4 


obligation  is  not  an  absolute  fixed  legal  liability  but  is  con¬ 
tingent  upon  the  financial  condition  of  the  maker;  and  ac¬ 
cordingly  held  that  the  insurance  company  was  liable  for 
loss  on  all  the  cars  in  the  possession  of  the  railroad  company, 
notwithstanding  the  fact  that  the  latter  was  not  legally  liable 
to  the  owners. 

In  view  of  the  exceedingly  broad  construction  which  the 
courts  have  placed  upon  the  time  honored  and  familiar  phrases 
to  which  reference  has  been  made,  it  is  important  for  the  party 
insured,  whether  it  be  a  railroad  or  other  transportation 
company,  a  warehouseman,  a  laundryman,  a  tailor,  a  com¬ 
mission  merchant  or  other  bailee,  to  determine  before  the  fire 
whether  he  desires  the  insurance  to  be  so  broad  in  its  cover  as 
to  embrace  not  only  his  own  property  and  interest,  but  also  the 
property  of  everybody  else  which  may  happen  to  be  in  his 
custody ;  if  so,  he  should  be  careful  to  insure  for  a  sufficiently 
large  amount  to  meet  all  possible  co-insurance  conditions,, 
and  if  he  wishes  to  make  sure  of  being  fully  reimbursed  for 
his  own  loss,  his  only  safe  course  is  to  insure  for  the  full 
value  of  all  the  property  in  his  possession. 

At  this  point  the  inquiry  which  naturally  presents  itself 
is,  how  should  a  policy  be  written  if  a  merchant,  warehouse¬ 
man  or  other  bailee  desires  to  protect  his  own  interest  but 
not  the  interest  of  any  one  else?  The  following  form  is 
suggested :  “On  merchandise  his  own,  and  on  his  interest 
in  and  on  his  legal  liability  for  property  held  by  him  in  trust 
or  on  commission  or  on  joint  account  with  others,  or  sold 
but  not  removed,  or  on  storage  or  for  repairs,  while  con¬ 
tained,  etc.”  This  will,  it  is  believed,  limit  the  operation  of 
co-insurance  conditions  and  at  the  same  time  prevent  the 
owners  from  adopting,  appropriating  or  helping  themselves 
to  the  bailee’s  insurance,  for  which  they  pay  nothing  and  to 
which  they  are  not  equitably  entitled. 

Many  of  the  household  furniture  forms  now  in  use,  in 
addition  to  embracing  almost  every  conceivable  kind  of  per¬ 
sonal  property  except  that  specifically  prohibited  by  the  pol¬ 
icy  conditions,  are  also  made  to  cover  similar  property  be¬ 
longing  to  any  member  of  the  family  or  household,  visitors, 
guests  and  servants. 

This  form  would  seem  to  indicate  considerable  ingenu¬ 
ity  on  the  part  of  the  broker,  broad  liberality  on  the  part  of 
the  insurance  company  and  commendable  generosity  on  the 
part  of  the  insured,  and  the  latter  would  probably  feel  more 
than  compensated  by  being  able  to  reimburse  his  guest  for 
any  fire  damage  he  might  sustain  while  enjoying  his  hospi¬ 
tality,  but  the  amount  of  insurance  carried  under  such  a  form 
should  anticipate  the  possibility  of  his  having  a  number  of 
guests  at  one  time  and  a  corresponding  increase  in  the  value 
at  risk. 

It  must  be  borne  in  mind  that  in  localities  where  co- 
insurance  conditions  prevail  the  value  of  property  belonging 


5 


to  all  members  of  the  household,  guests  and  servants  will 
be  taken  into  account  for  co-insurance  purposes  in  event  of 
loss,  and  as  guests  frequently  have  with  them  wearing  ap¬ 
parel  and  jewelry  of  considerable  value,  a  situation  might 
easily  arise  which  would  result  in  quite  a  large  part  of  the 
loss  being  uncollectible. 

But  aside  from  the  element  of  co-insurance,  which  is  not 
generally  applicable  to  household  furniture  risks,  the  fact 
remains  that  under  such  a  form  the  members  of  the  house¬ 
hold,  visitors,  guests  and  servants  are  insured  quite  as  ef¬ 
fectually  as  the  party  specifically  named  as  the  “insured”  in 
the  policy,  and  by  merely  adopting  the  insurance  which  has 
been  generously  provided,  they  will  have  just  as  much  right 
to  the  proceeds,  to  the  extent  of  their  interest,  as  the  nominal 
insured,  for  a  policy  so  written  is  controlled  by  the  same 
principles  as  those  governing  property  held  in  trust  or  for 
account  of  whom  it  may  concern. 

If,  therefore,  the  insured  does  not  desire  to  carry  in¬ 
surance  for  an  amount  sufficiently  large  to  meet  these  possi¬ 
ble  contingencies,  he  should  content  himself  with  a  less  am¬ 
bitious  form  of  policy,  otherwise  he  may  under  certain  con¬ 
ditions  find  himself  the  victim  of  his  own  generosity. 

In  the  absence  of  co-insurance  conditions,  this  broad,  all- 
inclusive  form  need  not  give  the  average  householder  any 
special  concern  for  it  is  highly  improbable  that  a  guest  at 
a  private  residence  would  presume,  uninvited,  to  avail  himself 
of  his  host’s  insurance,  although  servants  and  members  of 
a  household  who  are  not  members  of  the  family  might  not 
be  so  considerate. 

It  is,  however,  an  exceedingly  dangerous  form  for  use 
in  policies  covering  the  contents  of  quasi  public  institutions, 
hotels  and  boarding  houses,  for  it  is  hardly  conceivable  that 
the  managers  or  proprietors  would  desire  to  carry  and  pay 
premium  on  insurance  sufficient  to  cover  the  uncertain  and 
constantly  changing  value  of  the  property  of  their  guests, 
^especially  when  they  are  under  no  obligation  to  do  so. 

The  question  is  frequently  asked  whether  goods  in  bond 
should  be  insured  for  the  value  with  or  without  the  inclusion 
of  customs  duties  or  internal  revenue  tax;  also  whether  the 
policy  form  should  affirmatively  include  or  exclude  the  duty 
or  tax  or  make  no  mention  of  it  whatever. 

According  to  the  internal  revenue  laws  (Sections  3221 
and  3223),  when  any  distilled  spirits  in  bond  are  destroyed 
by  accidental  fire  or  other  casualty,  without  any  fraud,  collu¬ 
sion  or  negligence  of  the  owner  thereof,  no  tax  shall  be  col¬ 
lected  on  such  spirits  so  destroyed,  or,  if  collected,  it  shall 
be  refunded  upon  the  production  of  satisfactory  proof  that 
the  spirits  were  destroyed  as  specified  in  the  statute.  But 
when  the  owners  may  be  indemnified  against  such  tax  by  a 
valid  claim  of  insurance,  for  a  sum  greater  than  the  actual 
value  of  the  distilled  spirits,  before  and  without  the  tax  be- 


6 


ing  paid,  the  tax  shall  not  be  remitted  to  the  extent  of  such 
insurance.  In  short,  the  insurance  would  be  regarded  as 
covering  the  tax  to  that  extent,  and  the  insurance  companies 
would  have  no  subrogation  rights.  As  virtually  all  losses 
on  spirits  in  bond  occur  without  negligence  on  the  part  of  the 
owner,  and  as  the  statute  makes  the  refund  or  cancellation 
of  the  bond  mandatory,  there  would  seem  to  be  no  necessity 
whatever  for  insuring  the  tax,  and  the  usual  and  better  prac¬ 
tice  is  to  affirmatively  exclude  it  in  the  policy  forms.. 

As  respects  duties  on  imports,  the  situation  is  somewhat 
different.  According  to  Section  2984  of  the  United  States; 
Revenue  Statutes,  the  Secretary  of  the  Treasury  is  “auth¬ 
orized,”  upon  production  of  satisfactory  proof  of  the  actual 
injury  or  destruction,  in  whole  or  in  part,  of  any  merchandise 
while  in  bond,  by  accidental  fire  or  other  casualty,  to  abate 
or  refund,  as  the  case  may  be,  the  amount  of  import  duties 
paid  or  accruing  thereupon ;  and,  likewise  to  cancel  any  ware¬ 
house  bond  or  bonds  in  whole  or  in  part,  as  the  case  may  be.. 

Although  there  is  no  court  decision  definitely  passing; 
upon  the  question  as  to  whether  the  above  provision  is  man¬ 
datory  or  whether  the  matter  is  left  by  the  statute  entirely 
within  the  discretion  of  the  Secretary  of  the  Treasury,  it 
has  for  years  been  the  practice  of  the  Treasury  Department 
to  treat  it  as  if  it  were  mandatory,  and  it  is  practically 
certain  that  the  owner  of  goods  in  a  bonded  warehouse 
would  not  lose  anything  on  account  of  duties  in  event  of 
destruction  of  the  property  by  fire. 

Some  very  good  authorities  entertain  the  opinion  that  it 
is  not  advisable  to  affirmatively  exclude  duties  from  the  cover 
of  the  policies,  and  in  the  absence  of  special  mention  of  the 
duties  in  the  form,  the  imported  value,  without  duties,  will 
be  the  basis  of  settlement  for  loss  and  co-insurance  purposes. 

All  the  decisions  prior  to  the  enactment  of  Section  2984, 
providing  for  the  refund  or  abatement,  were  to  the  effect 
that  as  the  insured  was  absolutely  liable  to  pay  the  duties, 
even  though  the  goods  were  destroyed,  his  only  relief  was 
to  look  to  his  insurers,  but  there  does  not  appear  to  have 
been  any  decision  since  the  enactment  of  said  section  as  to 
its  effect  upon  the  liability  of  the  insurer. 

On  the  other  hand,  some  good  authorities  entertain  the 
opinion  that  if  the  insurance  is  sufficient  in  amount  and  the 
duties  are  not  expressly  excluded,  it  would  be  held  to  cover 
them,  because  they  become  an  obligation  immediately  upon 
importation,  and  the  owner  is  liable  for  them  until  he  obtains 
their  remission.  In  this  view  of  the  matter,  the  fact  that 
it  is  more  or  less  easy  to  get  the  duties  remitted  is  imma¬ 
terial,  and  it  is  believed  by  those  who  entertain  the  above 
opinion,  that  the  courts  would  not  allow  the  insurance  com¬ 
pany  to  compel  the  insured  to  reduce  his  claim  against  it 
by  enforcing  his  rights  against  the  United  States  Govern¬ 
ment. 


7 


This  might  possibly  be  true  if  the  duties  were  already 
paid  at  the  time  of  the  fire  or  paid  subsequently  in  order  to 
secure  the  release  of  the  property  for  salvage  purposes,  but 
in  this  event  the  insurance  company  would  be  subrogated  to 
the  rights  of  the  insured  against  the  Government.  If,  how¬ 
ever,  the  property  is  totally  destroyed  and  the  duties  remain 
unpaid,  it  is  difficult  to  perceive  how  the  insured  can  collect 
anything  beyond  the  invoice  value,  for  until  he  actually  pays 
the  duties,  he  sustains  no  loss  thereon,  even  temporarily,  and 
if  they  are  remitted,  he  never  will  sustain  any  loss  thereon. 

The  mere  fact,  however,  that  there  has  been  no  final 
court  decision,  and  that  there  are  differences  of  opinion  on 
the  subject,  emphasizes  the  advisability  of  having  it  definite¬ 
ly  stated  in  the  policy  form  whether  the  duty  is  to  be  con¬ 
sidered  a  part  of  the  value  insured  or  not,  and  it  is  also 
desirable  to  have  it  determined  before  the  fire  occurs  by 
whom  the  duty  and  warehouse  charges  shall  be  paid,  in  event 
of  its  being  necessary  to  remove  the  stock  from  the  bonded 
warehouse  to  protect  it  from  further  damage,  or  for  salvage 
or  other  purposes. 

The  following  form,  which  is  used  by  some  companies, 
would  seem  to  meet  the  necessities  of  the  situation  when  it 
is  desired  to  exclude  the  duty  as  a  part  of  the  value : 

It  is  understood  and  agreed  that  the  Custom  House  duties 
payable  to  the  United  States  Government  on  property  covered  by 
this  policy  shall  not  be  considered  as  part  of  the  value  insured  in 
event  of  loss  or  damage. 

It  is  also  understood  and  agreed  that  on  demand  of  this  Com¬ 
pany,  in  the  event  of  loss,  the  insured  shall,  “to  protect  the  property 
from  further  damage,”  promptly  pay  all  government  duties,  ware¬ 
house  and  other  charges  necessary  for  the  purpose  of  removal  of 
said  merchandise  to  such  other  location  as  may  be  designated  by 
this  Company. 

In  view  of  the  statute  providing  for  remission  or  abate¬ 
ment,  and  the  well  settled  policy  of  the  Treasury  Department 
in  interpreting  it,  there  does  not  appear  to  be  any  particular 
necessity  of  insuring  the  duty,  and  to  pay  premium  on  this 
additional  valuation  would  be  an  expense  without  compen¬ 
sating  benefits  commensurate  with  the  outlay. 

The  question  as  to  the  proper  form  to  use  when  property 
is  sold  under  contract  is  one  concerning  which  there  is  con¬ 
siderable  misapprehension,  a  great  many  entertaining  the 
erroneous  belief  that  so  long  as  the  legal  title  remains  in  the 
vendor,  he  is  the  owner  of  the  property  and  that  it  should 
be  insured  in  his  name. 

Where  the  contract  is  silent  upon  the  subject,  courts 
differ  as  to  whether  the  vendee  must  complete,  despite  the 
intermediate  destruction  of  the  building  by  fire.  The  English 
rule,  followed  by  some  other  courts,  is,  in  general,  that  the 
vendee,  whether  possession  has  been  given  or  not,  is  to  be 
regarded  as  the  equitable  owner,  liable  meanwhile  for  all 
losses  and  entitled  to  all  benefits,  if  not  in  default  under  the 


terms  of  the  executory  contract,  and  that  destruction  of  the 
building  by  fire  is  no  bar  to  an  action  for  specific  perform¬ 
ance  of  the  contract  of  sale.  But  the  tendency  of  decisions 
in  this  country  lends  support  to  the  rule  that  the  executory 
contract  falls  at  the  option  of  the  vendee,  if  the  vendor 
cannot  deliver  the  premises  in  substantially  as  good  condi¬ 
tion  as  when  the  contract  was  made.  (Browning  v.  Home 
Ins.  Co.,  71  N.  Y.  508;  Wood  v.  American  Fire  Ins.  Co., 
149  N.  Y.  372;  Tieman  v.  Citizens  Ins.  Co.,  76  App.  Div.  5; 
O’Neill  v.  Franklin  Fire  Ins.  Co.,  159  App.  Div.  313.) 

But  where  the  vendee  has,  in  addition  to  his  executory 
contract,  and  pending-  its  fulfillment,  taken  actual  possession 
and  control  of  the  property  and  is  in  a  position  to  enforce 
specific  performance,  it  has  been  quite  generally  held  that  he 
is  the  equitable  or  real  owner  of  the  property.  It  is  vendible 
as  his,  chargeable  as  his,  capable  of  being  encumbered  as  his ; 
it  may  be  devised  as  his,  would  descend  to  his  heirs,  and 
while  living  is  insurable  as  his.  The  vendor  who  retains 
the  legal  title  simply  has  a  lien  on  the  property  for  the 
unpaid  balance  due  on  the  contract ;  the  substance  of  owner¬ 
ship  has  passed — only  the  shadow  remains.  As  the  vendee 
under  these  conditions  can  insure  the  property  for  its  full 
value  as  his  own,  it  logically  follows  that  the  vendor  cannot 
insure  it  as  owner,  for  it  can  hardly  be  maintained  that  there 
can  be  two  sole  and  unconditional  owners  of  the  same  prop¬ 
erty  at  the  same  time.  Therefore,  a  New  York  Standard 
Policy  which  contains  a  stipulation  against  change  in  inter¬ 
est,  title  or  possession  becomes  void  unless  properly  endorsed, 
if  the  property  is  sold  under  contract  and  the  vendee  is 
given  possession.  (Sewell  v’.  Underhill,  197  N.  Y.  168, 
affirming  s.  c.  127,  App.  Div.  92 ;  Brighton  Beach  Racing  Ass’n 
v.  Home  Ins.  Co.,  113  App.  Div.  728,  affirmed  without  opinion, 
189  N.  Y.  526.) 

“When  the  vendee  under  an  executory  contract  binds 
himself  absolutely  to  complete  and  to  take  the  whole  title, 
whether  of  real  or  personal  property,  he  is  held  to  be  the 
sole  and  unconditional  owner.  But  where  the  agreement  to 
purchase  is  conditional  or  contingent,  whether  of  real  or 
personal  property,  so  that  a  fire  loss  will  not  fall  upon  the 
vendee,  then  his  interest  is  not  sufficient  to  satisfy  the  war¬ 
ranty  as  to  sole  and  unconditional  ownership.  The  beneficial 
owner  of  the  entire  property  is  the  real  owner.”  (Richards 
on  Insurance,  3rd  Edition,  336.) 

If  it  is  desired  to  protect  the  interest  of  the  vendor  only, 
it  can  be  done  by  issuing  policy  in  his  name,  but  it  is  abso¬ 
lutely  necessary  to  state  therein  that  the  property  has  been 
sold  under  contract  or  that  a  bond  has  been  given  for  a  deed. 
The  only  interest  the  vendor  has  left  to  protect  is  that  of  a 
vendor’s  lien  (an  interest  somewhat  similar  to  that  of  a  mort¬ 
gagee),  and  upon  payment  of  the  loss,  which  cannot  exceed 
the  unpaid  balance  due  on  the  contract,  the  insurance  com¬ 
pany  will  be  subrogated  to  the  extent  of  the  amount  paid. 

9 


If  it  is  desired  to  protect  the  interest  of  the  vendee  only, 
the  policy  should  be  issued  in  his  name  just  as  if  he  also  held 
the  legal  title.  It  is  customary  to  state  in  the  policy  form 
that  he  holds  a  bond  for  a  deed  or  a  contract  of  purchase, 
although  under  a  New  York  Standard  Policy  this  would 
hardly  seem  to  be  necessary  . 

If  it  is  desired  to  protect  the  interest  of  both  vendor  and 
vendee  it  can  be  done  by  issuing  the  policy  in  the  names  of 
both  and  stating  therein  that  the  property  has  been  sold 
under  contract  by  one  to  the  other,  and  making  loss,  if  any, 
payable  as  their  respective  interests  may  appear. 

A  policy  issued  to  the  vendor  setting  forth  the  fact  that 
the  property  has  been  sold  under  contract  to  the  vendee 
(naming  him)  and  making  loss  if  any  payable  to  each  as  their 
respective  interests  may  appear,  woukl  probably  be  held  to 
indicate  an  intention  to  cover  both  interests,  although  this  is 
getting  the  cart  before  the  horse  and  would  be  analogous  to 
issuing  a  policy  in  the  name  of  the  mortgagee  with  loss  if  any 
payable  to  the  mortgagor.  If  both  interests  are  intended  to 
l3e  covered  the  policy  should  so  state. 

A  policy  issued  in  the  name  of  the  vendee  in  possession, 
with  loss  if  any  payable  to  the  vendor,  as  his  interest  may 
appear,  with  a  mortgagee  clause  attached,  is  probably  the 
best  protection  that  the  latter  can  possibly  have. 

The  law  in  Maine  is  a  notable  exception  to  the  general 
rule.  In  that  state,  even  if  the  vendee  be  in  possession,  if 
the  building  is  destroyed  by  fire  the  vendee  cannot  be  com¬ 
pelled  to  take  a  deed  of  the  land  alone  and  pay  the  purchase 
money. 

Gould  vs.  Murch,  79  Me.,  288. 

In  Georgia,  by  reason  of  the  “Georgia  Loan  Deed”  stat¬ 
ute,  when  the  property  has  been  sold  under  contract,  neither 
the  vendor  nor  vendee  is  deemed  the  sole  and  unconditional 
owner  of  the  property ;  hence  it  is  absolutely  necessary  that 
the  interest  to  be  insured  be  fully  set  forth  in  the  form. 

Orient  Ins.  Co.  vs.  Williamson,  98  Ga.,  464. 

Williamson  vs.  Orient  Ins.  Co.,  100  Ga.,  791. 

Palatine  Ins.  Co.  vs.  Dickenson,  116  Ga.,  794. 

Athens  Mut.  Ins.  Co.  vs.  Evans,  132  Ga.,  703. 

Some  forms  contain  a  stipulation  that  the  policy  shall 
not  be  invalidated  if  contracts  for  sale  of  the  property  are 
executed  and  delivered.  This  will  save  the  policy  from  for¬ 
feiture,  but  it  will  only  cover  the  remaining  interest  of  the 
vendor. 

Several  years  ago  the  Uniform  Bill  of  Lading  was 
adopted  by  railroads  and  other  transportation  companies, 
with  the  endorsement  of  the  Interstate  Commerce  Commis¬ 
sion  acting  in  an  advisory  capacity.  The  only  provision 
therein  of  special  interest  to  insurance  companies  reads  as 
follows :  “Any  carrier  or  party  liable  on  account  of  loss  of 


10 


or  damage  to  any  of  said  property  shall  have  the  full  benefit 
of  any  insurance  that  may  have  been  effected  upon  or  on  ac¬ 
count  of  said  property,  so  far  as  this  shall  not  avoid  the 
policies  or  contracts  of  insurance.”  The  insertion  of  the 
closing  words  of  this  last  paragraph  was  secured  through 
the  efforts  of  marine  underwriters,  who  lost  no  time  in  pre¬ 
paring  suitable  clauses  to  counteract  the  effect  of  the  insur¬ 
ance  provision. 

From  the  various  warranties  prepared  by  marine  com¬ 
panies  to  meet  the  situation,  the  following  have  been  selected : 

Warranted  by  the  insured  free  from  any  liability  for  merchan¬ 
dise  in  the  possession  of  any  carrier  or  other  bailee  who  may  be  liable 
for  any  loss  or  damage  thereto,  and  any  stipulation  or  agreement 
that  such  carrier  or  bailee  shall  have  the  benefit  of  this  insurance, 
shall  void  this  policy  or  contract  of  insurance, 
also, 

Warranted  by  the  assured  free  from  any  liability  for  merchan¬ 
dise  in  the  possession  of  any  carrier  or  other  bailee,  who  may  be 
liable  for  any  loss  or  damage  thereto;  and  free  from  any  liability  for 
merchandise  shipped  under  a  Bill  of  Lading  containing  a  stipulation 
that  the  carrier  may  have  the  benefit  of  any  insurance  thereon ;  and 
that  any  insurance  against  fire  granted  herein  shall  not  cover  where 
the  assured  or  any  carrier  or  other  bailee  has  fire  insurance  which 
would  attach  if  this  policy  had  not  been  issued. 

Fire  insurance  companies  have  apparently  taken  no  ac¬ 
tion  toward  protecting  themselves  in  this  direction,  and  un¬ 
less  they  do  so  the  insurance  issued  by  them  will  inure  to  the 
benefit  of  the  carrier.  Although  the  Supreme  Judicial  Court 
of  Maine  in  the  case  of  Dyer  v.  Maine  Central  R.  R.  Co.  (99 
Me.  195)  held  that  an  insurance  provision  in  the  statute  of 
that  State  in  favor  of  a  railroad  company  will  not  deprive  an 
insurance  company  of  its  subrogation  rights  in  event  of 
negligence,  the  Supreme  Judicial  Court  of  Massachusetts,  in 
a  recent  decision  under  a  similar  statute,  held  to  a  contrary 
doctrine ;  New  England  Box  Co.  v.  N.  Y.  C.  &  H.  R.  R.  R. 
Co.  (41  Ins.  Law  Journal,  p.  517;  99  N.  E.  Rep.  140).  And 
the  United  States  Supreme  Court  has  held  that  a  stipulation 
in  a  bill  of  lading  that  the  carrier  shall  have  the  benefit  of 
any  insurance  on  the  goods  is  a  valid  one,  and  in  such  a  case, 
even  though  the  loss  be  occasioned  by  the  negligence  of  the 
carrier,  the  insurance  company  cannot  be  subrogated  to  the 
rights  of  the  shipper  to  recover  damages  for  such  negligence ; 
Phoenix  Ins.  Co.  v.  Erie  &  Western  Transportation  Co.  (15 
Ins.  Law  Journal,  p.  574;  117  U.  S.  312). 

The  recent  action  of  the  New  York  Insurance  Exchange 
in  abrogating  the  old  pattern  clause  and  requiring  patterns, 
models,  moulds,  matrices,  drawings,  designs,  dies,  solutions, 
photographic  negatives  or  lithographic  plates  or  stones  or 
engravings  thereon  to  be  specifically  covered,  and  in  preparing 
a  clause  precluding  the  possibility  of  their  being  covered  by 
general  terms  under  other  items  of  the  policy,  was  a  move 
in  the  right  direction,  and  the  rule  should  be  universally 
adopted  not  only  as  a  matter  of  sound  underwriting  practice, 


11 


but  in  the  interest  of  convenience  in  adjustments  and  as  a 
matter  of  simple  fairness  between  the  insured  and  the  com¬ 
pany.  All  of  the  articles  mentioned  are  of  uncertain  value 
and  belong  in  a  class  by  themselves ;  and  to  include  them  with 
machinery  and  fixtures,  the  value  of  which  is  easily  ascer¬ 
tainable,  invariably  complicates  the  adjustment,  especially 
when  the  policies  contain  the  full  co-insurance  clause  with  no 
limit  on  the  articles  in  question,  for  the  oldest  adjuster  present 
never  heard  of  a  poor  horse  (covered  by  insurance)  ever 
being  killed  by  lightning  or  a  dead  pattern  ever  being  de¬ 
stroyed  by  fire. 

A  case  is  now  pending  in  a  distant  city  under  the  follow¬ 
ing  conditions  :  blanket  policies  were  issued  for  over  $150,000, 
with  full  co-insurance  clause,  and  no  limit  on  patterns.  A 
comparatively  small  fire  occurred  in  the  basement  of  one 
building  belonging  to  the  plant  which  was  used  for  the 
storage  of  patterns  and  drawings.  If  the  fire  had  occurred 
in  some  other  part  of  the  plant,  the  probabilities  are  that,  in 
figuring  value  for  purposes  of  co-insurance,  the  basement  of 
the  burned  building  would  have  been  regarded  as  a  sort  of 
pattern  cemetery,  but  through  the  revivifying  influence  of  the 
fire  the  patterns  and  drawings  therein  instantaneously  as¬ 
sumed  a  valuation  of  about  $50,000,  or  about  one-  third  the 
value  of  the  entire  plant  and  contents. 

In  naming  a  specific  amount  on  patterns  and  drawings, 
the  company  knows  just  what  it  is  doing  and  just  what  to 
expect ;  in  insuring  them  blanket  without  limit,  it  ought  to 
know  from  experience  what  to  expect,  although  it  does  not 
know  just  what  it  is  doing. 

The  precaution  taken  by  the  framers  of  the  pattern 
clause  to  avoid  having  patterns  and  other  kindred  articles 
covered  by  general  terms  in  other  items  of  the  policy,  directs 
attention  to  the  fact  that  in  preparing  any  kind  of  form, 
special  care  should  be  taken  to  have  each  item  embrace 
exactly  the  property  intended  to  be  protected  by  it,  and 
neither  by  general  nor  specific  terms  have  the  same  property 
covered  under  more  than  one  item.  As  there  are  a  number 
of  exceedingly  broad  general  terms  such  as  “supplies,”  “ap¬ 
purtenances,”  etc.,  they  should  be  used  exactly  where  in¬ 
tended  and  not  elsewhere. 

Among  the  new  elements  which  have  been  introduced 
into  policies  of  fire  insurance  during  the  past  thirty  years,  by 
far  the  most  important  is  that  of  co-insurance,  which  has  its 
practical  manifestation  in  various  forms  familiarly  known  as 
the  “eighty  percent  co-insurance  clause,”  “the  percentage 
average  clause”  and  “the  reduced  rate  contribution  clause.” 
Co-insurance  is  fundamentally  sound  in  principle  and  an  ab¬ 
solutely  necessary  factor  as  an  equalizer  of  rates ;  and  al¬ 
though  by  some  strange  providence  it  almost  invariably  hap¬ 
pens  that  the  relative  sound  value  of  property  saved  is  much 
less  than  that  destroyed,  yet  the  co-insurance  or  average 


12 


clause,  by  maintaining  a  proper  relation  between  sound  value 
and  loss,  operates  in  a  large  measure  as  a  kind  of  automatic 
regulator  in  loss  adjustments. 

Co-insurance,  or  average  conditions,  if  a  proper  amount 
of  insurance  be  carried,  are  in  themselves  perfectly  harmless, 
but  if  used  in  connection  with  the  average  distribution  clause, 
special  care  should  be  taken  by  the  insured  or  his  broker  to 
see  that  all  policies  are  strictly  concurrent  and  that  all  con¬ 
tain  the  average  distribution  clause,  for  if  some  contain  the 
clause  and  others  do  not,  the  insured  may  be  compelled  to 
stand  a  portion  of  the  loss  himself,  notwithstanding  the  fact 
that  the  aggregate  insurance  may  exceed  the  aggregate  value. 
All  the  policies  should  contain  the  average  distribution  clause 
or  none  of  them  should. 

Policies  are  sometimes  issued  to  John  Doe  and/or  Rich¬ 
ard  Roe.  A  policy  so  issued  may  cover  one,  two  or  three 
distinct  interests  in  the  property  described  therein,  to  wit : — 
It  may  cover  the  interest  of  John  Doe  individually,  the  inter¬ 
est  of  Richard  Roe  individually,  and  the  interest  of  both 
jointly.  But  if  the  policy  be  subject  to  co-insurance  or  re¬ 
duced  rate  average  conditions,  it  is  only  proper  that  the  com¬ 
bined  value  of  all  the  interests  should  be  taken  as  the  basis 
for  their  application. 

Although  the  form  “John  Doe  and/or  Richard  Roe”  has 
come  into  use  quite  generally  during  recent  years,  it  is  doubt¬ 
ful  whether  it  is  any  broader  in  its  cover  than  a  policy  issued 
to  “John  Doe  and  Richard  Roe,  as  interest  may  appear”;  in 
fact,  good  argument  might  be  advanced  in  support  of  the 
view  that  a  policy  so  issued  would  be  more  comprehensive 
and  protective  to  the  insured  than  one  issued  to  “John  Doe 
and/or  Richard  Roe,”  unless  the  latter  should  also  contain 
the  words  “as  interest  may  appear.” 

If  one  of  the  parties  violates  the  conditions  of  the  policy 
it  will  be  void  only  as  to  his  individual  interest,  and  might  be 
as  to  the  joint  interest,  but  not  as  to  the  individual  interest 
of  the  party  not  participating  in  the.  violation.  A  possible 
exception  to  this  general  statement  should  perhaps  be  noted, 
for  it  may  be  that  the  few  states  which  have  declared  un¬ 
qualifiedly  in  favor  of  the  doctrine  that  the  policy  is  in¬ 
divisible,  and  those  which  have  decided  in  favor  of  condi¬ 
tional  indivisibility,  may  hold  that  if  it  is  void  as  to  one  inter¬ 
est,  it  is  void  as  to  all.  It  is  also  possible,  however,  that  they 
might  differentiate  a  policy  covering  several  different  inter¬ 
ests  from  one  covering  several  different  items.  .  Most  of  the 
states,  however,  which  have  passed  on  the  question  have  held 
to  the  view  that  the  policy  is  divisible,  notwithstanding  the 
plain  provision,  “This  entire  policy  shall  be  void,  etc.”  1  his 
opinion  evidently  assumes  that  sufficient  significance  is  given 
to  the  word  “entire”  if  it  is  construed  as  applicable  to  specific 
items  of  the  policy  instead  of  the  entire  instrument. 


13 


The  question  is  frequently  asked  as  to  how  a  draft  in 
payment  of  a  loss  under  a  policy  so  issued  should  be  drawn 
in  order  to  fully  protect  the  company.  The  opinion  is  quite 
general  among  underwriters  and  adjusters  that  when  paying 
a  loss  the  draft  should  be  made  out  precisely  as  the  policy 
is  written,  without  any  variation  or  shadow  of  turning,  and 
as  a  general  rule  this  is  correct.  But  is  this  true  in  respect 
of  a  policy  issued  to  “John  Doe  and/or  Richard  Roe?”  The 
answer  to  this  question  depends  on  the  answer  to  two  others  : 

First : — Does  a  draft  so  drawn  require  the  endorsement 
of  both  parties,  or  can  the  insurer  be  legally  compelled  to 
honor  it  upon  the  endorsement  of  either? 

Second : — If  a  draft  so  drawn  is  honored  upon  the  en¬ 
dorsement  of  one  of  the  parties  only,  will  the  insurer  thereby 
secure  a  full  release,  or  can  it  be  compelled  to  respond  to  a 
subsequent  claim  by  the  party  who  did  not  endorse  the  draft  ? 

The  opinion  seems  to  be  that  the  endorsement  of  one  of 
the  parties  will  be  sufficient  to  enable  said  endorser  to  collect, 
and  that  the  insurer  will  not  be  relieved  of  liability  in  respect 
of  any  later  claim  by  the  other  party  to  the  contract.  If 
these  conclusions  be  correct,  it  is  evident  that  the  insurer 
cannot  safely  issue  a  loss  draft  in  the  manner  indicated,  and 
that  in  the  absence  of  a  written  release  or  authorization  from 
one  of  the  parties,  the  draft  should  be  issued  in  the  names  of 
both  “John  Doe  and  Richard  Roe,”  omitting  the  word  “or.” 

If  the  draft  is  drawn  in  the  name  of  “John  Doe  and/or 
Richard  Roe,”  several  possibilities  present  themselves,  to  wit : 

(1)  If  the  loss  is  confined  to  the  property  belonging  to 
one  party  only,  who  files  his  claim,  and  the  draft  falls  into 
the  hands  of  the  other  party,  who  collects  on  his  own  en¬ 
dorsement,  the  company  is  not  released. 

(2)  If  claim  is  made  by  both  parties  for  loss  on  property 
belonging  to  each  individually,  and  the  draft  is  endorsed  by 
one  only,  who  makes  collection,  the  company  is  not  released 
as  to  the  interest  of  the  other. 

(3)  If  claim  is  made  by  one  or  both  parties  for  loss  on 
personal  property  belonging  to  both  jointly,  and  the  draft  is 
endorsed  and  collected  by  one  only,  the  Company  is  released 
as  to  the  joint  property.  This,  however,  is  not  necessarily 
so  with  respect  to  real  property. 

(4)  If  claim  is  made  by  one  party  only  for  the  full  face 
of  the  policy,  for  loss  on  property  belonging  to  himself  in¬ 
dividually,  and  the  draft  is  endorsed  by  him  only,  and  collec¬ 
tion  made,  and  if  a  later  claim  is  also  made  for  the  full  face 
of  the  policy  by  the  other  party  for  loss  on  his  individual 
interest  in  the  property,  the  insurer  would  be  compelled  to 
pay  the  second  claimant  to  the  extent  of  his  ratable  interest 
in  the  policy.  In  other  words,  in  such  circumstances  the  in¬ 
surer  will  have  the  privilege  of  paying  out  probably  one  hun¬ 
dred  and  fifty  percent  of  its  policy  in  settlement  of  the  two 
claims. 


14 


(5)  If  claim  is  made  by  one  party  only  for  loss  on  his 
individual  interest  in  the  property,  and  the  other  party  gives 
a  release  or  authorizes  payment  to  the  first  party,  the  draft 
could  with  perfect  safety  be  made  payable  to  said  first  party 
only,  or  it  could  be  made  payable  to  both  jointly,  in  the  form 
“John  Doe  and  Richard  Roe,”  but  it  would  not  be  absolutely 
safe  to  issue  it  in  the  names  of  both  with  the  conjunctions 
“and/or”  for,  as  above  stated,  if  it  should  happen  to  fall  into 
the  hands  of  the  wrong  party,  who  endorses  and  collects,  the 
company  would  not  be  released. 

Is  the  property-owner  absolutely  safe  in  accepting  a 
policy  in  the  form  “John  Doe  and/or  Richard  Roe?”  This 
depends  on  circumstances.  Assuming  that  the  value  of  all 
interests  must  be  the  basis  for  the  application  of  co-insurance 
conditions  in  all  cases,  if  both  parties  to  the  contract  are  so 
situated  with  respect  to  the  property  that  they  are  at  all  times 
fully  posted  as  to  the  total  value  at  risk,  so  that  the  amount 
of  joint  insurance  can  be  regulated  in  accordance  with  their 
co-insurance  necessities,  they  have  nothing  to  fear  on  that 
score,  but  if  either  one  or  the  other  is  not  so  situated,  he  runs 
the  risk  of  being  a  co-insurer  in  the  event  of  loss. 

In  those  states  which  have  held  unqualifiedly  that  the 
policy  is  divisible  the  assured  may  safely  accept  policies  in 
the  form  “John  Doe  and/or  Richard  Roe,”  but  in  those  states 
which  have  held  to  the  contrary,  one  party  may  possibly  be 
running  the  risk  of  having  the  entire  contract  rendered  void 
by  some  act  on  the  part  of  the  other. 

It  is  for  the  parties  insured  to  determine  for  themselves 
whether  or  not  the  advantages  of  this  form  outweigh  the  dis¬ 
advantages,  but  when  a  policy  is  so  issued  the  insurers  are 
entitled  to  a  full  and  complete  release  in  the  event  of  loss, 
even  though  the  giving  of  same  may  at  times  cause  one  or 
both  of  the  parties  some  inconvenience. 

The  safest  course,  and  in  fact  the  only  absolutely  safe 
course  for  the  insurer,  is  to  issue  the  loss  draft  in  all  instances 
in  the  form  “John  Doe  and  Richard  Roe,”  thereby  securing 
a  release  as  to  each  individual  interest,  and  the  joint  interest 
if  any. 

Virtually  every  insurance  company  doing  business  is 
requested  with  more  or  less  frequency,  when  the  loss  is  less 
than  $100,  and  sometimes  when  it  is  more,  to  eliminate  from 
the  loss  draft  the  name  of  the  mortgagee  to  whom  the  loss 
is  payable,  on  account  of  the  difficulty  attendant  upon  secur¬ 
ing  his  receipt  and  endorsement.  In  most  instances  this  can 
be  done  with  comparative  safety,  but  inasmuch  as  the  loss 
payable  clause  is  placed  on  the  policy  at  the  request  of  the 
insured,  the  insurance  company  should  not  be  asked  to  ignore 
the  request  after  it  has  become  a  contractual  obligation  and 
assume  all  responsibility  therefor.  The  possible  inconvenience 
connected  with  securing  the  mortgagee’s  release  is  well  known 
when  the  policy  is  issued,  and  if  the  parties  do  not  desire 


15 


small  losses  paid  to  the  mortgagee,  it  can  be  very  easily  ar¬ 
ranged  by  making  loss  if  any  above  a  certain  fixed  amount 
payable  to  him  as  his  interest  may  appear,  and  in  some  in¬ 
stances  this  is  done. 

If  a  policy  covers  on  building  and  stock  under  separate 
items  and  it  is  the  desire  of  the  parties  that  the  loss  if  any 
on  building  only  shall  be  payable  to  a  third  party,  it  should 
so  state,  otherwise  the  loss  under  the  entire  policy  will  be 
payable  to  him. 

Is  the  insurer  liable  for  loss  when  a  property  owner  has 
released  a  railroad  company  from  liability?  When  the  insured 
has,  prior  to  issue  of  the  policy,  released  a  railroad  company 
or  wrongdoer  from  liability  for  fire  due  to  negligence  or 
other  cause,  and  fails  to  advise  the  insurer  of  such  release, 
has  he  concealed  or  misrepresented  any  material  fact  or  cir¬ 
cumstance  which  precludes  recovery  from  his  insurer ;  in 
other  words  where  the  insured  has  by  his  own  act  deprived 
the  insurer  of  its  subrogation  rights,  is  it  a  good  defense  to 
an  action  on  the  policy  ? 

In  England  in  the  case  of  Tate  v.  Hyslop  (1884,  15  C. 
B.  Q.,  3688  Eng.),  the  Upper  Court  reversed  the  finding  of  the 
Lower  Court  and  held  that  when  the  insured  released  the 
common  carrier  from  liability  (except  negligence)  and  knew 
or  should  have  known  that  the  underwriters  charged  a  higher 
premium  on  goods  carried  under  such  conditions,  the  in¬ 
sured’s  failure  to  disclose  such  release  would  (and  in  this 
case  did)  defeat  recovery  from  the  underwriters. 

There  are  several  American  decisions  bearing*  on  the  sub¬ 
ject,  among  which  may  be  mentioned  the  following: 

Pelzer  v.  St.  Paul  F.  &  M.  Ins.  Co.,  U.  S.  C.  C.  19  Ins.  Law 
Journal,  p.  372;  41  Fed.  271; 

Pelzer  v.  Sun  Insurance  Office,  South  Carolina  S.  C.  21  Ins.  Law 
Journal,  p.  952; 

Greenwich  Ins.  Co.  v.  L.  &  N.  Ry.  Co.,  Ky.,  1902.  Vol.  31  Ins. 
Law  Journal,  p.  298;  112  Ky.  598;  66  S.  W.  411. 

The  Courts  of  this  country  have  not  been  as  generous  to 
the  underwriters  as  the  English  courts,  but  from  an  analysis 
of  the  decisions,  we  feel  warranted  in  drawing  the  following 
conclusions,  viz : 

Such  agreements  are  valid  if  there  is  a  proper  considera¬ 
tion  therefor;  and  they  are  not  against  public  policy. 

When  the  insured  has,  previous  to  the  fire,  and  before 
the  issue  of  the  policy,  released  the  railroad  company  from 
liability  and  neglected  to  disclose  such  fact  to  the  insurer 
when  applying  for  insurance,  it  is  a  question  for  the  jury  to 
determine  whether  the  failure  to  make  such  disclosure  was 
concealment  of  a  material  fact,  and  where  the  insurers  dis¬ 
criminate  against  property  subject  to  such  release  to  the  ex¬ 
tent  of  charging  a  higher  rate,  and  this  fact  is  known  to  the 
insured,  but  not  to  the  insurer  or  his  agent,  and  he  fails  to 
pay  the  higher  rate  and  have  notice  of  release  endorsed  on 
the  policy,  there  would  be  a  reasonable  chance  of  defeating 


16 


the  claim  on  this  ground;  but  where  there  is  no  such  dis¬ 
crimination  on  the  part  of  the  companies,  it  would  seem  that 
the  insurer  would  have  no  hope  of  a  successful  defense. 

All  courts  which  have  passed  on  the  question,  with  the 
exception  of  the  Supreme  Judicial  Court  of  Massachusetts, 
the  Court  of  Errors  and  Appeals  of  New  Jersey,  the  United 
States  Supreme  Court  and  the  English  Courts  (all  of  very  high 
caliber),  have  decided  that  a  fact  known  to  an  agent  at  the 
time  the  policy  is  issued  cannot  be  taken  advantage  of  by  the 
insurer  as  a  defense,  but  most  courts  have  held  that  a  fact 
coming  to  the  knowledge  of  an  agent  after  a  policy  has  been 
issued,  must  be  endorsed  in  writing  on  the  policy  in  order  to 
be  binding  upon  the  insurer. 

If,  therefore,  the  agent  of  the  insurance  company  is 
aware  of  the  fact  that  a  release  has  been  given  by  the  prop¬ 
erty  owner  to  the  railroad  company  when  he  issues  the  policy, 
the  insurance  company,  in  most  states,  would  be  estopped 
from  setting  up  this  fact  as  a  defense,  but  in  the  states  of 
Massachusetts  and  New  Jersey,  or  where  a  case  might  be 
transferred  to  the  Federal  Court,  the  insurance  company 
could  take  advantage  of  this  defense. 

When,  after  the  issue  of  the  policy,  the  insured  enters 
into  a  contract  with  a  railroad  company,  agreeing  to  hold  it 
harmless  from  any  liability  from  loss  by  fire,  there  can  be 
no  recovery  against  the  insurer  (Down’s  Farmers  Warehouse 
Association  v.  The  Pioneer  Mutual  Insurance  Association, 
Washington,  S.  C.,  35  Ins.  Law  Journal,  p.  273). 

It  is  the  practice  of  the  insurance  companies  to  make  an 
extra  charge  of  from  five  to  fifteen  percent  of  the  annual 
premium  in  the  Northern  States,  and  as  high  as  twenty-five 
percent  in  the  Southern  States,  on  account  of  the  existence 
of  such  agreements  and  notwithstanding  the  well-known  in¬ 
clination  of  the  courts  to  favor  the  insured,  it  would  be  the 
part  of  wisdom  for  him  to  pay  the  additional  premium  and 
be  fully  protected  by  having  the  following  endorsement  made 


on  his  policies :  “In  consideration  of  $ . ,  addi¬ 

tional  premium,  notice  is  hereby  accepted  that  the  assured 
has  waived  the  right  of  recovery  from . for  any  damage 


by  fire  occurring  to  the  property  described  herein  or  affected 
thereby.” 

There  are  two  kinds  of  insurance  which  have  in  recent 
years  become  quite  popular,  to  wit:  Use  and  Occupancy  In¬ 
surance  and  Profit  Insurance. 

The  term  “Use  and  Occupancy”  is  somewhat  vague  and 
indefinite.  It  usually  involves  the  idea  of  earnings  and  profits, 
but  they  are  not  necessarily  synonymous  terms.  Use  and 
Occupancy  Insurance  is  analogous  to  Rent  Insurance  or  Profit 
Insurance,  but  it  is  broader  than  either,  as  the  insurance  com¬ 
panies  discovered  in  the  Buffalo  Elevating  Company  case 
several  years  ago  (Michael  v.  Prussian  National  Insurance 
Company,  171  N.  Y.  25),  where  the  Court  permitted  the  in- 


17 


sured  to  collect  over  $60,000  for  an  alleged  loss  of  use,  a 
large  part  of  which  was  not  really  sustained,  for  the  insured, 
as  members  of  a  pool,  composed  of  many  elevator  owners, 
was  by  agreement  to  receive,  and  subsequently  did  receive, 
their  full  share  of  the  pool  earnings  in  spite  of  fire  destroying 
the  elevator  in  question. 

Use  and  Occupancy  Insurance  is  adapted  more  partic¬ 
ularly  to  manufacturing  risks  and  Profit  Insurance  to  mer¬ 
cantile  risks,  although  it  is  customary  for  manufacturers  to 
take  out  Profit  Insurance  on  finished  goods,  sold  or  contracted 
for.  There  has  been  a  feeling,  which  still  exists  ■  in  some 
quarters,  that  this  class  of  insurance  has  a  tendency  to  in¬ 
crease  the  moral  hazard,  but  probably  on  account  of  the  dis¬ 
criminating  care  on  the  part  of  the  insurers  in  selecting  their 
risks,  the  record  thus  far  has  failed  to  justify  these  fears. 

This  class  of  insurance  should  not  be  written  indis¬ 
criminately.  In  fact  it  would  seem  to  be  against  public  policy 
for  it  to  become  universal.  It  should  not  be  granted  to  any 
individuals,  firms,  or  corporations,  except  those  of  the  highest 
standing,  doing  a  profitable  business,  and  it  calls  for  the 
utmost  good  faith  on  the  part  of  the  contracting  parties. 

In  a  distant  city  some  time  ago,  a  comparatively  small 
fire  occurred  in  the  assembling  department  of  a  large  manu¬ 
facturing  plant  which  consisted  of  sixteen  buildings.  This 
department  was  the  one  which  of  all  others,  could  be  shut 
down  and  discommode  the  insured  the  least,  and  on  the  basis 
of  the  payroll,  it  constituted  as  a  factor  in  production  a  little 
over  five  percent  of  the  plant. 

The  adjusters  figured  the  actual  use  and  occupancy  loss 
at  less  than  $1,000,  but  claim  was  presented  for  $27,000  or 
$9,000  per  day  for  three  days,  just  as  if  the  entire  plant  had 
been  thrown  out  of  commission ;  and  in  addition  to  this, 

$9,000  for  profit  on  stock  which  had  been  destroyed,  making 
a  total  claim  of  $36,000  which  modest  figure  was  subsequently 
raised  by  the  filing  of  amended  proofs  for  $61,000. 

The  form  provided  that  if  any  of  the  buildings  or  the 
contents  thereof  should  be  so  damaged,  destroyed  or  disabled 
as  to  entirely  prevent  the  insured  from  producing  “finished 
goods,”  the  companies  should  be  liable  per  day  for  each 
working  day  of  such  prevention,  for  an  amount  not  exceeding 
the  net  average  daily  yield  of  the  plant  for  three  hundred 
working  days  immediately  preceding  the  fire.  It  also  con¬ 
tained  the  usual  provision  in  regard  to  partial  prevention.  (j 

It  did  not,  however,  contain  any  element  of  co-insurance  and 
the  insurance  actually  carried  amounted  to  only  thirty-five 
percent  of  the  annual  net  profits. 

The  insured  contended,  not  that  they  were  entirely  pre¬ 
vented  from  carrying  on  their  business  of  manufacture,  but 
that  they  were  entirely  prevented  from  producing  “finished 
goods” — as  if  the  production  of  finished  goods  did  not  require 
the  use  of  the  entire  plant,  but  only  the  finishing  department. 


18 


"X 


During  these  three  days  they  were  producing  finished  engines, 
finished  transmissions,  finished  bodies,  and  all  such  parts,  but 
in  the  opinion  of  the  insured’s  counsel,  all  this  counted  for 
naught,  because  they  were  in  the  business  of  producing  fin¬ 
ished  automobiles. 

The  claim  was  finally  compromised  for  $10,000,  but  if 
the  word  “finished”  can,  in  a  given  case  engross  the  attention 
of  three  firms  of  attorneys,  consume  several  thousand  dollars 
in  expenses,  and  protract  the  adjustment  of  a  three  days’1 
partial  loss  for  fifteen  months,  it  would  surely  seem  as  if  it 
were  a  good  one  to  eliminate  from  the  use  and  occupancy 
form. 

There  are  many  use  and  occupancy  forms  in  current  use 
which  it  will  be  impossible  even  briefly  to  analyze.  In  fact, 
use  and  occupancy  insurance  and  the  kindred  subjects  of 
rent,  rental  value,  leasehold  and  profit  insurance  if  fully  con¬ 
sidered,  each  possesses  in  itself  sufficient  material  for  a  special 
paper. 

When  insuring  commissions  and/or  profits  the  form 
should  limit  the  liability  of  the  insurer  to  not  exceeding  a 
certain  percent  of  the  sound  value  of  the  stock,  and  it  should 
also  contain  a  stipulation  that  the  loss  of  commissions  and/or 
profits  shall  not,  in  any  event,  exceed  said  percent  of  the 
amount  of  damage  which  the  merchandise  itself  shall  be 
found  to  have  sustained,  irrespective  of  whether  said  damage 
be  ascertained  by  agreement,  by  appraisement,  or  whether  the 
stock  be  surrendered  to  the  companies  covering  same,  and  the 
net  loss  ascertained  through  sale  of  the  salvage.  The  policy 
should  also  be  subject  to  average  or  co-insurance  conditions. 

The  following  “market  value”  clause  is  now  frequently 
used  in  connection  with  lumber  risks : 

It  is  understood  and  agreed  that  in  event  of  loss  or  damage  to 
lumber  the  basis  of  settlement  and  application  of  the  average  (co- 

insurance)  clause  shall  be  the  market  value  at . the  day  of  the 

fire,  less  cost  of  transportation  and  marketing  at  the  time  and  place 
of  fire. 

The  following  is  used  in  polcies  covering  on  stock  in 
tanneries : 

It  is  understood  and  agreed  that  in  the  event  of  loss  or  damage 
to  the  property  hereby  insured  the  basis  of  settlement  on  tanned 
leather,  finished,  unfinished  or  in  the  rough,  shall  be  the  market  price 
of  similar  leather  in  Boston,  Mass.,  the  day  of  the  fire,  less  cost  of 
finishing  and  transportation. 

and  somewhat  similar  clauses  are  inserted  in  policies  covering 
on  whiskey,  sugar  and  other  staple  products  in  the  hands  of 
a  manufacturer. 

The  Supreme  Court  of  Michigan,  in  1892  (Mitchell  v. 
St.  Paul  German  Ins.  Co.,  92  Mich.  594),  and  the  Texas  Court 
of  Civic  Appeals,  in  1898  (Hartford  Fire  Ins.  Co.  v.  Cannon), 
decided  that  the  basis  of  indemnity  for  lumber  is  the  market 
value.  The  Supreme  Court  of  Pennsylvania  had  decided  that 
the  “Actual  cash  value  of  sewing  machines  was  the  cost  to 


19 


the  insured,  who  was  a  manufacturer,  to  reproduce  them.” 
(Standard  Sewing  Machine  Co.  v.  Royal  Ins.  Co.,  201  Pa. 
State,  645.)  But  when  the  same  Court  ran  up  against  whiskey, 
because  of  the  peculiar  nature  of  that  commodity,  it  staggered 
and  fell  into  the  market  value  column.  (Frick  v.  United 
Firemen’s  Ins.  Co.,  218  Pa.  State,  409.) 

The  United  States  Circuit  Court  of  Appeals  followed 
with  a  similar  decision  (Mechanics  Ins.  Co.  v.  C.  A.  Hoover 
Distilling  Co.,  vol.  40  Ins.  Law  Journal,  p.  347 ;  182  Fed.  590), 
so  that  unless  the  parties  to  the  contract  agree  that  the  words 
“actual  cash  value”  and  “costs  to  replace,”  as  applied  to 
goods  in  the  hands  of  a  manufacturer,  shall  be  construed  to 
mean  “cost  to  reproduce,”  there  appears  to  be  no  good  reason 
why  the  market  value  clause  should  not  be  used  in  policies 
covering  on  lumber  and  whiskey  at  least,  for  it  is  more  than 
probable  that  other  jurisdictions  will  follow  the  precedents 
already  established  and  that  the  companies  will  be  under  the 
necessity  of  settling  future  losses  thereon  on  that  basis, 
whether  the  policies  contain  such  a  provision  or  not. 

To  just  what  extent  the  judicial  inclination  may  feel  im¬ 
pelled  to  go  in  favor  of  market  value  as  applied  to  goods  in 
the  hands  of  a  manufacturer  in  construing  the  New  York 
Standard  Policy  remains  to  be  seen,  but  in  the  meantime  the 
miarket  value  clause  should  not  be  inserted  in  policies  issued 
to  manufacturers  except  on  risks  where  the  companies  would, 
if  liability  were  limited  to  cost  of  production,  be  perfectly 
willing  to  write  profit  insurance.  After  all,  the  difference 
between  having  cost  of  production  and  profit  merged  in  one 
set  of  policies  and  having  policies  covering  each  separately 
is  not  very  great ;  in  fact,  in  principle,  the  difference  is  the 
same  as  that  between  blanket  and  specific  insurance,  and  in 
cases  where  insurance  of  both  cost  and  profit  are  not  objec¬ 
tionable,  the  terrors  of  the  market  value  clause  would  be  in  a 
large  measure  neutralized  by  average  or  co-insurance  condi¬ 
tions,  and  no  such  risk  should  be  written  unless  subject  to 
such  conditions. 

It  would  be  interesting  to  consider  forms  covering  com¬ 
mon  carrier  liability,  improvements  and  betterments,  lease¬ 
hold  interest,  mortgagee’s  interest,  rents,  rental  value,  re¬ 
insurance  ;  also  clear  space,  iron  safe  and  three-fourths  value 
clauses ;  policies  issued  to  heirs,  administrators,  estates,  etc. 
But  it  was  difficult  enough  to  know  where  to  begin  this 
subject,  and  it  is  still  more  difficult  to  know  where  to  stop. 

In  general,  policy  forms  contain  many  superfluous  words. 
For  instance,  in  that  relic  of  the  past  commencing:  “On 
household  and  kitchen  furniture,  useful  and  ornamental,”  five 
words  out  of  the  eight  are  unnecessary,  and  in  that  other 
inheritance  from  our  ancestors,  reading :  “On  merchandise, 
hazardous,  non-hazardous  and  extra  hazardous,”  six  words 
out  of  the  eight  are  redundant,  and  the  same  criticism  will 
apply  to  a  large  majority  of  the  forms  in  current  use.  The 


20 


longest  form  may  afford  the  shortest  indemnity,  and  a  good 
form  can  be  very  materially  weakened  by  the  injudicious 
addition  of  words,  although  it  is  better  to  use  too  many 
than  too  few.  Vital  points  should  be  covered  and  useless 
phrases  omitted.  The  three  graces  of  the  ideal  insurance 
form  are  clearness,  conciseness  and  completeness. 

One  of  the  best  things  in  the  New  York  Standard  Policy 
is  on  the  back  of  it :  “It  is  important  that  the  written  portions 
of  all  policies  covering  the  same  property  read  exactly  alike. 
If  they  do  not,  they  should  be  made  uniform  at  once.”  If 
proper  attention  were  given  to  this  admonition,  the  vocation 
of  the  apportionment  expert  would  be  gone  and  some  of  the 
troubles  that  now  vex  us  would  be  at  an  end. 


21 


USE  and  OCCUPANCY 
INSURANCE 


AN  ADDRESS 


DELIVERED  BEFORE 

The 

Fire  Insurance  Society 

of  Philadelphia 


November  18th,  1912 


BY 


W.  N.  BAMENT 


General  Adjuster 


THE  HOME  INSURANCE  COMPANY 

NEW  YORK 

c 


Use  and  Occupancy  Insurance 


William  N.  Bament,  General  Adjuster 
The  Home  Insurance  Company,  New  York 


An  Address  Before  the  Fire  Insurance  Society  of  Philadelphia , 

November  18,  1912 


Since  the  first  fire  insurance  policy  issued  by  an  American 
company  was  written  in  the  city  of  Philadelphia  one  hundred 
and  sixty  years  ago,  insurance,  the  “handmaid  of  commerce,” 
has  gone  steadily  forward,  keeping  pace  with  the  marvelous 
development  of  the  country,  and  we  now  have  the  insurance 
business  of  today  with  its  hundreds  of  millions  of  capital, 
ready  to  meet  every  legitimate  requirement  of  our  social, 
commercial  and  industrial  life. 

During  the  past  thirty  years  a  number  of  new  elements 
have  been  introduced  into  the  business  of  fire  insurance, 
among  the  more  important  of  which  may  be  mentioned  elec¬ 
tricity  for  light  and  power,  automatic  sprinklers,  co-insurance 
and  the  subject  of  this  address,  “Use  and  Occupancy  Insur¬ 
ance.” 

Any  discussion  of  this  branch  of  the  business  would  not 
be  complete  without  a  consideration  of  the  kindred  subjects 
of  rent,  rental  value,  and  profit  insurance ;  in  fact,  use  and 
occupancy  insurance  embraces  all  the  others  and  more,  and 
the  former  bears  about  the  same  relation  to  the  latter  as 
blanket  insurance  does  to  specific.  Some  attention,  therefore, 
will  be  devoted  to  these  and  also  to  the  closely  related  subject 
of  leasehold  insurance. 

The  New  York  form  of  rent  policy  reads  as  follows: 

“The  intention  of  this  insurance  is  to  make  good  the  loss 
of  rents,  caused  by  fire  or  lightning,  actually  sustained  by  the 
assured  on  occupied  or  rented  portions  of  the  premises  which 
have  become  untenantable  for  and  during  such  time  as  may 
be  necessary  to  restore  the  premises  to  the  same  tenantable 
condition  as  before  the  fire;  *  *  but  this  company  shall 

not  be  liable  for  a  greater  proportion  of  any  loss  than  the 
sum  hereby  insured  bears  to  the  actual  annual  rental  of  the 
entire  occupied  or  rented  portions  of  the  premises.” 


1 


The  framers  of  this  form  no  doubt  thought  that  it  was 
perfectly  clear,  but,  nevertheless,  several  questions  present 
themselves  in  connection  therewith.  First,  what  is  meant  by 
“loss  of  rents  *  *  actually  sustained  by  the  assured?” 

Does  this  mean  gross  rents,  as  contended  by  some,  and  as  fre¬ 
quently  though  not  always  construed  in  practice,  or  does  it 
mean  gross  rents  less  those  expenses  which  may  be  saved  to 
the  insured  during  the  period  of  reconstruction,  such  as  light¬ 
ing,  heating,  elevator  service,  janitor  service,  collections, 
insurance  and  the  like? 

The  Courts  May  Always  Be  Counted  On 

to  construe  the  contract  most  liberally  in  favor  of  the  insured, 
and  if  they  should  declare  that  this  class  of  insurance  is 
valued,  the  rents  being  fixed  amounts  usually  set  forth  in 
leases,  then  in  the  absence  of  a  stipulation  in  the  contract  to 
the  contrary,  it  would  be  construed  like  any  other  valued 
policy  and  the  insurer  would  be  liable  for  loss  of  gross  rent 
without  any  deductions  therefrom. 

Although  it  is  possible  that  they  may  so  hold,  we  are 
hardly  warranted,  in  view  of  their  strong  inclination  to  adhere 
in  their  decisions  to  the  fundamental  principle  of  indemnity, 
in  concluding  that  they  would  go  out  of  their  way  to  discover 
a  valued  feature  in  a  policy  form,  where  there  is  no  evidence 
- — except  remotely  inferential — of  its  existence.  In  fact,  reason 
and  justice  would  seem  to  point  in  exactly  the  opposite  direc¬ 
tion. 

If  the  policy  is  not  valued,  it  should  be  interpreted  like 
any  other  contract  of  indemnity,  and  there  is  no  more  logical 
reason  why  one  should  recover  more  than  his  actual  loss  on 
rents  than  he  should  on  any  other  kind  of  property.  And  the 
fact  that  the  policy  limits  liability  to  loss  on  rents  “actually 
sustained,”  lends  emphasis  to  the  view  that  the  policy  is  not 
valued,  and  these  words,  if  they  have  any  significance  what¬ 
ever,  should  be  controlling. 

The  highest  court  in  England,  speaking  through  some  of 
the  brightest  minds  that  ever  graced  the  King’s  Bench,  is 
unanimous  in  standing  for  the  principle  that  under  a  contract 
of  fire  insurance,  the  insured  in  case  of  loss,  shall  be  fully 
indemnified,  but  shall  never  be  more  than  fully  indemnified ; 
that  the  insured  is  not  entitled  to  receive  anything  by  way  of 
indemnity,  if  he  has  in  fact  sustained  no  loss  ;  that  in  order 
to  ascertain  what  a  loss  is,  everything  must  be  taken  into 
account  which  is  received  by  and  comes  to  the  hand  of  the 
insured,  and  which  diminishes  that  loss.  And  the  United 
States  Supreme  Court  has  declared  in  equally  emphatic  lan¬ 
guage,  “If  a  loss  happens,  anything  which  reduces  or  dimin¬ 
ishes  that  loss  reduces  or  diminishes  the  amount  which  the 
indemnifier  is  bound  to  pay.”  (Chicago,  etc.,  R.  R.  Co.  vs. 
Pullman  Car  Co.,  139  U.  S.  79-88.) 


Massachusetts,  which  departed  from  the  principle  in  con¬ 
nection  with  the  interest  of  a  mortgagee  (King  vs.  State 
Mutual  F.  Ins.  Co.,  7  Cush.,  1),  in  another  case,  speaking- 
through  its  highest  court,  said :  “The  assured  is  only  entitled 
to  be  put  in  the  same  condition  pecuniarily  that  he  would  have 
been  if  there  had  been  no  fire.”  Two  prominent  decisions  by 
the  Court  of  Appeals  of  New  York — Foley  vs.  Manufacturers’ 
and  Builders’  Ins.  Co.  (152  N.  Y.,  131),  and  Michael  vs.  Prus¬ 
sian  National  Ins.  Co.  (171  N.  Y.,  25),  have  impressed  many 
with  the  belief  that  said  court  has  departed  from  the  funda¬ 
mental  principle  of  indemnity,  but  a  careful  analysis  of  the 
opinions  hardly  warrants  this  conclusion.  In  the  decision  in 
the  last  named  case,  which  will  be  referred  to  later,  it  was  the 
valued  feature  that  over-indemnified  the  insured. 

In  the  light  of  the  authorities  referred  to,  it  is  clear  that 
unless  the  policy  is  a  valued  one,  it  is  incumbent  upon  the 
insured,  under  a  rent  policy,  to  prove  what  his  actual  net  loss 
is,  after  making  proper  deduction  for  everything  in  the  way 
of  salvage  which  may  come  to  him. 

In  many  cases  there  would  be  no  diminution  in  the  regular 
running  expenses,  but  in  event  of  a  serious  damage  to  or  the 
total  destruction  of  the  building  this  might  be  a  very  im¬ 
portant  factor. 

The  Average  Condition  at  the  End  of  the  Rent  Clause 

is  not  necessarily  inconsistent  with  the  foregoing  basis  of 
recovery,  but  in  event  of  deduction  being  made  from  the  gross 
loss  for  salvage  in  expense  of  maintenance  during  reconstruc¬ 
tion,  equity  would  suggest  a  corresponding  modification  in 
the  value  when  applying  the  average  condition. 

Nearly  if  not  all  rent  losses  are  partial ;  the  present  forms, 
which  differ  somewhat  in  various  portions  of  the  field,  have 
been  in  use  for  many  years ;  the  loss  record  has  not  been  un¬ 
favorable ;  very  little  difficulty  has  been  experienced  in  ad¬ 
justments  ;  settlements  are  usually  made  on  a  compromise 
basis,  and  many  claimants  no  doubt  take  into  consideration 
the  salvage  in  expenses  in  their  adjustment  negotiations,  so 
that  this  question  does  not  arise  very  frequently  as  a  practical 
proposition.  A  form  could  doubtless  be  prepared  which  would 
eliminate  the  element  of  doubt,  which  in  the  minds  of  many 
surround  the  present  ones,  yet  the  attempt  would  present  its 
difficulties,  and  unless  we  experience  more  trouble  in  the  future 
than  we  have  in  the  past  in  the  adjustment  of  this  class  of 
losses,  and  unless  the  necessity  for  a  change  becomes  more 
apparent  than  it  has  up  to  the  present  time  it  would  be  ad¬ 
visable  to  let  it  remain  as  it  is. 

Another  inquiry  which  suggests  itself  is  whether,  under 
the  above  form,  if  certain  portions  of  the  premises  are  oc¬ 
cupied  by  the  landlord  himself  and  not  rented,  the  insurer 
would  be  liable  for  the  rental  value  thereof.  The  term  rent  is 
hardly  applicable  to  this  condition,  and  the  phrases  “loss  of 


3 


rent  actually  sustained”  and  “actual  annual  rental”  tend  to 
confirm  this  view.  This  condition  should  be  covered  under 
a  rental  value  policy  or  as  an  element  of  use  and  occupancy 
insurance.  But  the  particular  form  under  discussion  covers 
“occupied  or  rented  portions,”  and  this  would  in  all  probability 
be  held  to  include  occupancy  by  the  insured. 

Rental  Value  Policies 

are  written  at  an  advanced  rate  to  cover  loss  of  rents  or  rental 
value  of  the  premises  whether  occupied  or  vacant  at  the  time 
of  the  fire.  The  theory  upon  which  this  class  of  insurance  is 
based  is  that  the  premises  have  a  value  as  rentable  property 
and  may  be  rented  at  any  time ;  hence,  if  destroyed  by  fire 
the  insured  may  be  deprived  of  the  income  which  would  other¬ 
wise  accrue  to  him.  It  will  also  cover  the  rental  value  of 
that  portion  of  the  premises  occupied  by  the  owner  himself. 
If  not  valued  the  amount  of  loss  under  a  policy  of  this  nature 
must  necessarily  be  established  by  extraneous  evidence. 

If  it  is  the  intention  of  underwriters  to  cover  the  occu¬ 
pancy  by  the  owner  of  the  building  under  the  rental  value 
and  not  under  the  regular  rent  form  (occupied  only)  in  use 
in  New  York  city,  they  can  find  room  for  improvement  in  the 
latter  in  respect  of  the  words  “occupied  or  rented,”  to  which 
reference  has  been  made. 

Leases  Contain  All  Sorts  of  Conditions, 
and  forms  of  policy  covering  leasehold  interests  are  cor¬ 
respondingly  varied.  Under  certain  conditions  a  landlord  and 
tenant  may  both  have  an  insurable  interest  in  the  subject 
matter  for  its  full  value,  and  unless  he  has  otherwise  been  fully?' 
indemnified  each  mav  recover  from  his  own  insurers  the  full 
value  thereof.  The  landlord  has  an  insurable  interest  as 
owner  and  if  his  tenant  is  under  covenant  to  repair  he  is  ex¬ 
posed  to  the  risk  of  his  tenant  being  unable  to  fulfill  his  obli¬ 
gation.  On  the  other  hand,  a  tenant  vfho  is  under  covenant 
to  repair  or  restore  the  building  in  case  of  fire,  has  an  in¬ 
surable  interest  both  by  reason  of  his  right  to  use  the  demised 
premises  and  by  reason  of  this  assumed  liability  to  restore, 
and  he  cannot  be  fully  indemnified  in  event  of  the  building 
being  destroyed  by  fire  unless  he  recovers  from  his  insurers 
the  full  value  thereof.  This  does  not  constitute  double  in¬ 
surance,  and  there  is  no  right  of  contribution,  as  the  interests 
are  separate  and  distinct. 

This  would  seem  to  imply  a  possible  double  indemnity, 
but  the  equitable  doctrine  of  subrogation  has  been  adopted 
to  prevent  this,  and  the  great  English  decisions  give  this 
doctrine  the  widest  scope  and  application  by  placing  the  in¬ 
surers  in  the  position  of  the  insured  upon  payment  of  the  loss, 
and  giving  them  the  advantage  of  every  right  or  remedy 
whether  in  contract  or  in  tort,  or  otherwise,  which  the  insured 
himself  may  have. — Castellain  vs.  Preston  (1883),  11  Q.  B.  D., 
380;  Darrell  vs.  Tibbitts  (1880),  5  Q.  B.  D.,  560. 


4 


There  is  probably  nothing  stronger  in  the  language  of 
any  court  than  Justice  Brett’s  elucidation  of  the  doctrine  of 
subrogation  as  set  forth  in  these  decisions,  in  support  of  the 
principle  that  the  insured  is  entitled  to  a  full  indemnity,  but 
nothing  more.  This  reasoning  is  so  sound  fundamentally 
that  it  is  impossible  to  conceive  of  any  court  clothed  in  its 
right  mind  rendering  an  opinion  at  variance  therewith. 

There  is  a  case  in  point  in  New  York  city,  where  the 
owner  of  a  certain  building  carries  insurance  thereon  (includ¬ 
ing  improvements  made  by  lessee),  for  its  full  value,  several 
hundred  thousand  dollars.  The  lessee  who  is  liable  for  rent 
and  for  all  repairs,  unless  he  avails  himself  of  the  statute  and 
surrenders  the  premises,  also  carries  a  large  insurance  cover¬ 
ing  his  interest.  Four  losses  have  occurred  during  the  past 
few  years,  all  of  which  have  been  paid  by  the  lessee’s  insurers, 
no  claim  being  made  against  the  insurers  of  the  lessor. 

There  are  a  Number  of  Other  Conditions 

supporting  an  insurable  interest  on  the  part  of  the  lessee.  He 
may  have  paid  the  full  rental  in  advance  with  no  right  of 
abatement ;  he  may  have  obligated  himself  to  pay  rent  during 
the  entire  term  of  the  lease  even  though  the  premises  should 
be  destroyed  by  fire.  He  has  the  right  to  the  use  and  enjoy¬ 
ment  of  the  demised  premises.  Very  frequently  the  premises 
are  sublet  at  a  profit,  and  insurance  may  be  taken  out  by  the 
lessee  to  cover  that  interest ;  or  he  may  occupy  the  demised 
premises  himself,  and  owing  to  an  advance  in  the  value  of  the 
leasehold  interest  he  may  take  out  insurance  to  cover  this 
increased  value. 

One  of  the  most  common  forms  of  leasehold  insurance 
is  valued,  and  provides  that  if  the  premises  shall  be  totally 
destroyed  by  fire  the  company  shall  pay  the  whole  amount  in¬ 
sured,  less  a  deduction  of  a  stated  amount  per  month  for  the 
time  that  shall  have  elapsed  between  the  date  of  the  policy 
and  the  date  of  the  fire.  And  in  case  of  damage  the  company 
shall  pay  at  the  rate  of  a  stated  amount  per  month  until  by 
the  exercise  of  due  diligence  the  premises  can  be  made  tenant- 
able.  As  in  the  case  of  all  valued  policies,  care  should  be 
taken  to  ascertain  whether  the  facts  or  conditions  warrant  the 
valuation  stated  in  the  contract. 

The  following  comes  from  a  Western  city : 

“A,  the  owner,  leases  the  building  to  B ;  he  sublets  to  C, 
and  he  in  turn  sublets  to  D,  for  the  unexpired  term  of  ten 
vears ;  D  agrees  to  pay  a  stated  rental,  and  in  addition  to  this 
a  bonus  of  $50,000,  in  annual  instalments  of  $5,000  each.  In 
event  of  total  destruction  of  the  building  by  fire  the  lease 
may  be  canceled  at  the  option  of  either  lessor  or  lessee,  but 
the  above  bonus  is  to  be  paid  in  any  event,  and  D  takes  out 
insurance  to  cover  this  liability.  A,  no  doubt,  has  policies 
covering  the  building  and  rents.  B  probably  has  insurance 


5 


covering  his  profit  on  the  lease,  and  C,  who  may  not  care  to 
rely  absolutely  upon  the  agreement  with  D,  may  also  have 
insurance  covering  his  profit.” 

We  have  here  a  chain  of  insurable  interests  which  may 
be  extended  indefinitely,  fairly  rivaling  in  its  possibilities  the 
famous  house  that  Jack  built. 

In  Chicago  a  hotel  company  took  out  policies  covering 
on  the  use  and  occupancy  of  a  hotel,  the  loss  to  be  computed 
from  the  date  of  the  fire  to  the  time  when,  by  the  exercise  of 
due  diligence,  the  building  could  be  rebuilt.  After  the  fire  the 
lessor  exercised  his  right  to  cancel  the  lease,  there  being  164 
days  still  to  run.  The  building  could  have  been  repaired  in 
eighty-four  days,  but  the  insured  brought  suit  claiming  in¬ 
demnity  for  164  days.  The  court  very  properly  held  that  the 
insured  could  collect  for  only  eighty-four  days.  The  hotel 
company  should  have  taken  out  insurance  on  its  leasehold 
interest  instead  of  use  and  occupancy  insurance. 

Insurance  Is  Frequently  Written 

covering  buildings  standing  on  leased  ground,  and  under  the 
policy  conditions  it  is  absolutely  necessary  for  this  fact  to  be 
indorsed  thereon.  It  is  self-evident  that  if  a  company  writes 
ti  policy  covering  a  building  on  leased  ground,  with  the  lease 
•on  the  verge  of  expiration,  with  no  privilege  of  renewal  and 
with  no  option  of  sale  to  the  lessor,  it  is  tempting  fate  and 
playing  with  fire. 

The  Supreme  Judicial  Court  of  Massachusetts  (two  jus¬ 
tices  dissenting)  has  held  that  the  lessee  of  the  land  who 
"erects  a  building  thereon,  which  reverts  to  the  landlord  at 
expiration,  has  an  insurable  interest  in  the  building  for  its  full 
value,  although  the  lease  has  only  two  years  to  run,  the  policy, 
of  course,  stating  that  it  is  located  on  leased  ground.  (Fowler, 
et  al.  vs.  Springfield  F.  &  M.  Ins.  Co.,  7  Ins.  Law  Journal, 
p.  189.) 

The  New  York  court,  however,  under  a  similar  state  of 
facts,  held  that  while  the  lessee  had  an  insurable  interest,  it 
was  not  for  the  full  value  of  the  building  but  for  the  value 
of  the  tenement  for  occupation,  subject  to  rent,  during  the 
unexpired  term.  (Niblo  vs.  North  American  Fire  Ins.  Co., 
3  N.  Y.,  Superior  Court,  p.  551.) 

The  New  York  Court  has  also  held  that  when,  under  the 
terms  of  the  lease,  the  lessee  had  the  right,  at  expiration,  to 
remove  the  building  erected  by  him,  the  lessor  had  no  interest 
therein,  and  that  the  lessee  was  entitled  to  collect  the  full 
value  thereof,  notwithstanding  the  fact  that  the  lease  had  only 
seventeen  days  to  run  when  the  fire  occurred,  and  if  removed, 
it  would  net  the  lessee  only  about  20  per  cent,  of  its  value. 
(Laurent  vs.  The  Chatham  Fire  Ins.  Co.,  1  Hall  R.,  41.) 

Profits  and/or  commissions  must  be  insured  as  such, 
although  in  respect  of  lumber  in  the  hands  of  a  mill  owner, 
and  whiskey  in  the  hands  of  a  distiller,  the  insurer  is  liable 


6 


for  market  value,  which,  of  course,  includes  the  manufacturer’s 
profit.  “Market  value”  clauses  are  now  frequently  inserted 
in  policies  covering  on  leather,  whiskey,  lumber,  sugar  and 
other  staple  products  in  the  hands  of  producers  and  this  is 
virtually  assuming  liability  for  loss  on  profits  in  addition  to 
the  cost  of  producing  the  goods.  Just  how  far  this  class  of 
decisions  or  this  practice  may  extend  it  is  impossible  to  pre¬ 
dict,  but  in  cases  where  the  insurer  would  readily  write  profit 
insurance  and  literally  run  after  use  and  occupancy  insurance, 
the  market  value  clause  may  be  viewed  with  comparative 
equanimity,  provided  it  is  accompanied  by  that  automatic 
regulator — a  co-insurance  or  reduced  rate  average  clause. 

When  insuring  commissions  and/or  profits,  the  form 
should  limit  the  liability  of  the  insurer  to  not  exceeding  a 
certain  per  cent,  of  the  sound  value  of  the  stock,  and  it  should 
also  contain  a  stipulation  that  the  loss  on  commission  and/or 
profits  shall  not,  in  any  event,  exceed  said  per  cent,  of  the 
amount  of  damage  which  the  merchandise  shall  be  found  to 
have  sustained,  irrespective  of  whether  said  damage  be  ascer¬ 
tained  by  agreement,  by  appraisement,  or  whether  the  stock 
be  surrendered  to  the  companies  covering  the  same,  and  the 
net  loss  ascertained  through  sale  of  the  salvage. 

This  may  not  in  some  instances  be  entirely  fair  to  the 
insured,  whose  actual  loss  of  profits  may  materially  exceed 
the  figure  thus  ascertained,  but  it  affords  an  easy  method  of 
adjustment  and  is  probably  as  liberal  a  contract  as  the  com¬ 
panies  can  safely  issue. 

The  advent  of  automatic  sprinklers,  the  prompt  recogni¬ 
tion  by  the  New  England  mutual  insurance  companies  of  their 
value  as  the  greatest  of  all  agencies  in  the  line  of  fire  protec¬ 
tion,  and  the  failure  on  the  part  of  stock  companies  to  rec¬ 
ognize  their  importance  as  an  underwriting  factor,  resulted 
in  the  transfer  of  a  large  portion  of  the  insurance  on  textile 
mills  in  New  England  from  stock  to  mutual  companies.  And 
it  was  with  a  view  of  counteracting  this  diversion  that  Mr. 
Henry  R.  Dalton,  of  Boston,  and  Mr.  A.  W.  Damon,  president 
of  the  Springfield  E.  &  M.  Insurance  Company,  devised  the 
first  use  and  occupancy  form  of  which  we  have  any  record. 

The  Phrase  “Use  and  Occupancy” 

is  somewhat  vague  and  indefinite,  and  it  is  difficult  to  define 
with  precision.  It  usually  involves  the  idea  of  earnings  or 
profits,  but  they  are  not  necessarily  synonymous  terms..  The 
New  York  Court  of  Appeals  has  attempted  to  define  it  in  one 
of  the  few  cases  bearing  on  the  subject,  under  a  form  simply 
covering  “use  and  occupancy”  without  any  descriptive  terms. 

The  case  referred  to  is  the  celebrated  one  of  Michael  vs. 
Prussian  National  Insurance  Company  (171  N.  Y.,  p.  25), 
which  in  anv  discussion  of  the  subject  requires  special  con¬ 
sideration.  The  policy  was  a  valued  one  providing  for  the 


7 


payment  of  a  certain  fixed  amount  for  every  day  required  for 
reinstatement.  The  insured,  the  Buffalo  Elevating  Co.,  which 
owned  and  operated  a  large  elevator  in  Buffalo,  entered  into  a 
secret  pooling  arrangement  for  the  active  season  with  other 
elevator  owners,  the  agreement  providing  that  after  payment 
of  certain  operating  expenses,  the  balance,  to  wit,  80  per  cent, 
of  the  gross  earnings  of  the  Buffalo  Elevating  Co.  should  be 
turned  over  absolutely  to  the  pool,  and  that  the  Elevating 
Company  should  continue  to  receive  its  full  share  of  the  entire 
pool  earnings,  even  though  their  elevator  should  be  destroyed 
by  fire.  The  time  required  for  rebuilding  was  fixed  by  arbitra¬ 
tion  at  259  days,  and  the  total  claim  under  46  policies 
amounted  to  $60,328.87.  The  companies  defended  on  the 
ground  that  there  had  been  a  change  of  interest  in  the  subject 
of  insurance  and  that  the  insured  was  not  the  sole,  uncondi¬ 
tional  owner  of  the  same. 

The  court  held  that,  notwithstanding  the  transfer  of  the 
total  earnings  to  another,  the  insured  was  the  sole  and  un¬ 
conditional  owner  under  a  use  and  occupancy  policy,  that 
there  was  no  change  in  interest  in  the  subject  matter  described 
in  the  policies,  and  that  the  doctrine  of  equitable  subrogation 
did  not  apply.  The  court  said : 

“Use  and  occupancy,  as  terms  of  insurance,  may  assume 
within  their  general  scope,  the  expectation  of  profits  and 
earnings  derivable  from  property,  but  the  terms  appear  to 
have  a  broader  significance  as  to  the  subject  of  insurance, 
and  to  apply  to  the  status  of  the  property  and  to  its  continued 
availability  to  the  owner  for  any  purpose  he  may  be  able  to 
devote  it  to.  *  * 

“If  the  subject  of  insurance  was  the  earnings  and  income 
of  the  elevator,  then  it  was  affected  by  the  agreement  in  ques¬ 
tion.  There  was  under  that  construction  a  change  effected  in 
their  ownership,  or  in  the  interest  of  the  assured  and  a  con¬ 
sequent  breach  of  warranty.  If  the  subject  of  insurance  was 
not  the  earnings  nor  the  income,  as  the  endeavor  has  been  to 
point  out,  but  the  mere  continuance  of  the  elevator  plant  in  a 
state  or  condition  of  availability  for  use  and  occupation,  then 
it  mattered  not  what  was  done  with  the  earnings  of  the  busi¬ 
ness  so  conducted.” 

Inasmuch  as  the  insurance  was  held  to  be  valid,  the 
highest  court  in  the  State  of  New  York  has  virtually  held 
that  insurance  of  use  and  occupancy  is  not  insurance  of  earn¬ 
ings  or  income.  And  the  unhappy  phrase  “Use  and  Occu¬ 
pancy,”  unaccompanied  by  any  explanation  in  the  form  as 
to  what  it  meant,  cost  the  insurers,  under  valued  policies,  over 
$60,000.  and  the  insured  were  clear  gainers  by  the  fire  to 
that  extent. 

A  lower  court  in  New  York,  in  a  later  case  bearing  in¬ 
directly  on  the  subject  of  use  and  occupancy,  and  referring  to 
the  Michael  case,  used  the  following  language: 


8 


“But  the  profits  of  the  business  were  quite  another  risk 
and  not  at  all  covered  by  the  phrase  ‘use  and  occupancy.’ 
Perhaps  the  market  value  of  that  interest  may  be  as  ascer¬ 
tained  by  proofs  in  the  absence  of  agreement,  but  it  clearly 
does  not  consist  of  profits  plus  fixed  charges.”  (Tannenbaum 
vs.  Freundlich,  81  N.  Y.  Supp.,  292.) 

Commenting  on  the  Michael  Decision, 
the  learned  text  writer  and  counsel  who  handled  the  case  for 
the  defendants,  well  says  that  if  the  earning  power  and  gross 
earnings  of  an  elevator  are  no  part  of  its  commercial  use',  it 
is  difficult  to  see  what  is.  If  an  absolute  transfer  of  the  total 
earnings  is  no  change  of  interest  whatsoever  in  the  subject 
matter  of  “use  and  occupancy”  insurance,  it  is  difficult  to  con¬ 
ceive  what  can  be.  And  the  layman,  who  in  his  daily  practice 
as  an  adjuster  of  losses  under  use  and  occupancy  policies,  not 
valued,  is  accustomed,  in  figuring  the  value,  to  allow  from  90 
to  100  per  cent,  thereof  for  net  profits,  may  well  ask  what 
elements  or  items  capable  of  being  expressed  in  dollars  and 
cents  really  go  to  make  up  the  value  of  this  mysterious  some¬ 
thing  known  as  “Use  and  Occupancy”  if  earnings  or  profits 
are  not  at  all  covered  by  the  phrase? 

The  court  seems  to  have  looked  upon  the  words  as  vague 
and  indefinite  and  in  ordei*  to  avoid  a  forfeiture  apparently 
chose  to  regard  it  as  a  collective  term  not  subject  to  analysis 
or  too  minute  inquiry  into  the  various  elements  going  to  make 
up  the  value  of  the  entire  subject  matter.  The  decision  may 
have  been  warranted  and  in  the  strictest  sense,  may  have  been 
legally  sound,  but  it  was  inequitable,  like  many  another — 
based  on  that  convenient  apology  “ambiguity,” — and  if  at 
some  future  time  under  different  conditions  the  learned  tribu¬ 
nal  which  gave  expression  to  the  foregoing  opinion  is  called 
upon  to  decide  just  what  is  to  be  taken  into  consideration  in 
arriving  at  the  value  of  the  use  and  occupancy  of  a  plant,  the 
insurance  fraternity  will  be  greatly  interested  in  learning 
what  it  has  to  say  on  this  subject. 

Use  and  Occupancy  Insurance 
is  written  covering  against  loss  caused  by  either  fire,  light¬ 
ning,  windstorm  or  sprinkler  leakage,  the  most  common  being 
fire  and  lightning.  There  has  been  a  feeling,  which  still  exists 
in  some  quarters,  that  this  class  of  insurance  tends  to  increase 
the  moral  hazard,  but  probably  on  account  of  the  discriminat¬ 
ing  care  on  the  part  of  companies  in  selecting  their  risks,  the 
record  thus  far  has  failed  to  justify  these  fears.  This  class 
of  insurance 

Cannot  Be  Written  Indiscriminately; 
in  fact,  it  would  be  against  public  policy  for  it  to  become 
universal.  It  cannot  with  safety  be  granted  to  any  individ¬ 
uals,  firms  or  corporations  except  those  of  the  highest  stand¬ 
ing  doing  a  profitable  business,  and  it  calls  for  the  utmost 
good  faith  on  the  part  of  the  contracting  parties. 


9 


In  a  distant  city  some  time  ago,  a  comparatively  small 
tire  occurred  in  the  assembling  department  of  a  large  manu¬ 
facturing  plant  which  consisted  of  sixteen  buildings.  This 
department  was  the  one  which  of  all  others,  could  be  shut 
down  and  discommode  the  insured  the  least,  and  on  the  basis 
of  the  payroll,  it  constituted  as  a  factor  in  production  a  little 
over  five  per  cent,  of  the  plant. 

The  adjusters  figured  the  actual  use  and  occupancy  loss 
at  less  than  $1,000,  but  claim  was  presented  for  $27,000,  or 
$9,000  per  day  for  three  days,  just  as  if  the  entire  plant  had 
been  thrown  out  of  commission ;  and  in  addition  to  this,  $9,000 
for  profit  on  stock  which  had  been  destroyed,  making  a  total 
claim  of  $36,000,  which  modest  figure  was  subsequently  raised 
by  the  filing  of  amended  proofs  for  $61,000. 

The  form  provided  that  if  any  of  the  buildings  or  the 
contents  thereof  should  be  so  damaged,  destroyed  or  disabled 
as  to  entirely  prevent  the  insured  from  producing  “finished 
goods,”  the  companies  should  be  liable  per  day  for  each 
working  day  of  such  prevention,  for  an  amount  not  exceeding 
the  net  average  daily  yield  of  the  plant  for  three  hundred 
working  days  immediately  preceding  the  fire.  It  also  con¬ 
tained  the  usual  provision  in  regard  to  partial  prevention.  It 
did  not,  however,  contain  any  element  of  co-insurance  and  the 
insurance  actually  carried  amounted  to  only  thirty-five  per 
cent,  of  the  annual  net  profits. 

The  insured  contended,  not  that  they  were  entirely  pre¬ 
vented  from  carrying  on  their  business  of  manufacture,  but 
that  they  were  entirely  prevented  from  producing  “finished 
goods” — as  if  the  production  of  finished  goods  did  not  require 
the  use  of  the  entire  plant,  but  only  the  finishing  department. 
During  these  three  days  they  were  producing  finished  engines, 
finished  transmissions,  finished  bodies,  and  all  such  parts,  but 
in  the  opinion  of  the  insured’s  counsel,  all  this  counted  for 
naught,  because  they  were  in  the  business  of  producing  fin¬ 
ished  automobiles. 

The  claim  was  finally  compromised  for  $10,000,  but  if 
the  word  “finished”  can,  in  a  given  case  engross  the  attention 
of  three  firms  of  attorneys,  consume  several  thousand  dollars 
in  expenses,  and  protract  the  adjustment  of  a  three  days’ 
partial  loss  for  fifteen  months,  it  would  surely  seem  as  if  it 
were  a  good  one  to  eliminate  from  the  use  and  occupancy 
form. 


In  Order  to  Determine  the  Amount 

of  insurance  to  be  carried,  a  conservative  manufacturer  ought 
to  take  the  net  profits  for  the  preceding  year,  add  a  certain 
percentage  for  expected  increase,  if  any,  during  the  coming 
year,  and  an  additional  amount  to  cover  fixed  charges  which 
cannot  be  dispensed  with,  for  the  period  of  total  or  partial 
prevention. 


10 


In  probably  no  branch  of  the  business  is  there  a  greater 
variety  of  forms  than  that  which  deals  with  Use  and  Occu¬ 
pancy  insurance.  The  regular  printed  forms  of  no  two  com¬ 
panies  and  no  two  brokers  read  exactly  alike,  and  each  has 
special  forms  to  meet  the  real  or  imaginary  requirements  of 
particular  risks.  But  notwithstanding  this  lack  of  uniform¬ 
ity,  virtually  all  contracts  of  this  nature  have  some  points  in 
common. 

AW  policies  of  this  class  contain  some  limitation  as  to 
liability.  These  limitations  assume  different  forms,  and 
among  those  most  frequently  used  may  be  mentioned  the 
following : 

One  three-hundredth  of  the  amount  of  the  policy 
for  each  day  of  total  prevention; 

Such  proportion  of  the  actual  loss  of  net  earnings 
that  the  amount  of  the  policy  bears  to  the  net  earnings 
for  three  hundred  working  days  of  twenty-four  hours 
each,  immediately  preceding  the  fire ; 

A  stated  amount  per  day  for  each  day  of  total  pre¬ 
vention,  said  limit  usually  being  one  three-hundredth  of 
the  amount  of  the  policy  on  the  theory  that  three  hun¬ 
dred  working  days  constitute  the  average  working  year; 

A  stated  amount  for  each  working  day  of  each  partic¬ 
ular  month,  for  instance,  $60  per  day  in  the  month  of 
December  and  $40  per  day  in  the  month  of  January, — 
this  form  being  used  in  connection  with  certain  classes  of 
risks  where  the  working  season  is  limited  to  six  or  seven 
months,  as  in  cotton  seed  oil  mills. 

Provision  Is  Also  Made  for  Ratable  Liability 

in  event  of  partial  prevention,  and  it  is  right  at  this  point 
that  the  ingenuity  of  the  underwriter  comes  into  play  in  his 
effort  to  construct  a  form  which  will  be  clear  and  concise, 
and  fair  both  to  the  insured  and  the  company.  And  if  anyone 
thinks  it  is  an  easy  task  to  prepare  such  a  form,  which  will 
be  free  from  criticism,  and  at  the  same  time  retain  the  good 
features  of  the  existing  forms,  he  can  soon  be  disillusioned 
by  making  the  attempt. 

Many  of  these  forms  are,  and  all  of  them  should  be, 
modified  by  prefixing  the  words  “not  exceeding”  to  the  above 
limits,  the  purpose  being  to  prevent  over-payment  in  event 
of  any  material  falling  off  in  business  activity.  Some  doubt, 
however,  has  been  expressed  as  to  whether  even  these  words 
are  sufficient  to  eliminate  the  valued  feature.  When  the  insur¬ 
ance  is  valued,  special  care  should  be  taken  to  guard  against 
over-insurance. 

In  writing  this  class  of  insurance  the  permits  and  limita¬ 
tions  usual  to  regular  fire  insurance  policies  (vacancy  and 
non-occupancy  permits  excepted)  are  ordinarily  included  in 
the  form. 


11 


Use  and  Occupancy  insurance  is  not  ordinarily  written 
with  a  co-insurance  or  reduced  rate  average  clause,  but  in 
some  contracts  the  element  of  full  insurance,  in  one  form  or 
another,  like  the  traveling  salesman’s  suit  of  clothes  and  the 
protective  tariff,  is  there  all  the  same. 

The  Different  Contracts  In  Use 
are  so  numerous  that  it  will  be  possible  to  consider  only  a 
few  selected  at  random. 

The  following  is  a  fair  sample  of  one  class  of  forms 
quite  generally  used : 

$ . On  the  use  and  occupancy  of . 

. located  at . . . 

It  is  agreed  that  if  by  reason  of  fire  on  the  above  mentioned 
premises,  the  assured  shall  be  wholly  prevented  from  producing  fin¬ 
ished  goods,  then  this  company  shall  be  liable  for  an  amount  not  ex¬ 
ceeding  $ .  per  day  for  each  working  day  from  date  of 

said  fire  to  date  (whether  the  same  fall  within  the  term  of  this  policy 
or  not)  when  production  of  such  goods  might,  with  reasonable  dil¬ 
igence,  have  been  recommenced.  But  if  the  normal  production  be 
diminished  only,  then  shall  this  company  be  liable  for  that  proportion 
of  said  per  diem  in  which  such  production  is  diminished,  it  being  un¬ 
derstood  that  under  no  circumstances  shall  this  company  be  liable  in 
the  aggregate  for  more  than  the  amount  of  this  policy. 

In  case  of  stoppage  of  production  by  fire,  as  above  specified,  the 
average  daily  production  of  the  twelve  months  immediately  preceding 
the  fire,  shall,  for  the  purpose  of  this  policy,  be  assumed  to  be  the 
normal  daily  production. 

In  the  first  place,  the  words  “producing  finished  goods” 
should  be  amended  by  eliminating  the  word  “finished,”  if  for 
no  other  reason  than  that  set  forth  in  the  incident  to  which 
reference  has  been  made. 

It  will  be  noticed  that  for  total  prevention,  the  limit  of 
liability  is  fixed  at  not  exceeding  a  certain  amount  per  day, 
but  no  provision  is  made  for  ascertaining  the  actual  loss  per 
day.  The  reference  to  the  normal  daily  production  has  to  do 
only  with  the  basis  of  settlement  for  partial  prevention.  If 
therefore,  for  some  time  previous  to  the  fire,  the  plant  had 
been  producing  much  less  than  its  normal  output,  the  ques¬ 
tion  which  naturally  presents  itself  is,  what  would  be  the  per 
diem  loss  under  the  policy  for  total  prevention?  Would  set¬ 
tlement  be  based  on  the  output  at  the  time  of  the  fire,  the 
average  daily  production  for  the  preceding  twelve  months,  or 
the  maximum  capacity  of  the  plant  irrespective  of  the  actual 
record  previous  to  or  at  the  time  of  the  fire?  I  am  inclined 
to  think  that  in  the  absence  of  a  provision  to  the  contrary, 
the  insured  could  enforce  a  claim  on  the  basis  of  the  real 
capacity,  whatever  that  might  be,  under  the  conditions  then 
prevailing  up  to  the  per  diem  limit,  the  same  as  he  could  col¬ 
lect  full  rental  value,  whatever  that  might  be,  up  to  the  limit 
under  a  rental  value  policy. 

According  to  this  view  the  words  “not  exceeding”  would 
lose  much  of  their  force,  but  conditions  might  arise  where  this 
limiting  provision  would  be  very  important.  It  might,  more- 


12 


over,  be  possible  for  the  insurer  to  prove  that  under  the  con¬ 
ditions  prevailing,  neither  the  maximum  nor  the  average 
capacity  could  have  been  maintained  even  if  the  fire  had  not 
occurred  and  that  this  might  affect  the  value  of  the  use  and 
occupancy. 

If,  at  the  time  of  the  fire,  the  plant  should  be  running  at 
a  capacity  much  in  excess  of  normal,  it  is  easily  conceivable 
that  a  severe  fire  might  reduce  the  capacity  considerable,  but 
not  below  normal,  in  which  event  there  could  be  no  claim 
under  such  a  form.  And  conversely,  if  at  the  time  of  the  fire 
the  output  should  be  much  less  than  normal,  the  insured 
might  be  correspondingly  benefited.  It  follows,  of  course, 
that  a  form  which  is  capable  of  producing  these  results,  is 
not  free  from  criticism. 

It  has,  however,  several  points  in  its  favor.  It  has  a  limit 
of  liability  in  event  of  total  prevention ;  it  affords  an  absolute 
basis  for  settlement  in  case  of  partial  prevention,  and  pro¬ 
vided  the  per  diem  limit  is  not  exceeding  1/300  of  the  amount 
of  the  policy,  and  not  less  than  the  normal  average  yield  for 
the  preceding  twelve  months,  it  saves  to  the  company  the  ele¬ 
ment  of  full  insurance  and  the  advantages  to  be  derived  there¬ 
from,  which  is  something  that  both  parties  to  the  contract 
doubtless  have  in  contemplation  when  the  policy  is  written. 
This  form,  notwithstanding  its  defects,  is  quite  as  fair  to  the 
insured  as  it  is  to  the  company,  for  the  former  knows  at  all 
times  how  the  business  is  running  and  can  regulate  his  insur¬ 
ance  accordingly,  while  the  latter  knows  nothing  until  after 
a  loss  has  occurred. 

The  following  form,  from  which  I  have  eliminated  the 
word  “finished,”  is  in  use  by  a  prominent  company : 

$ . On  the  use  and  occupancy  of . 

. Manufacturing  Buildings  situate  at . 

and  known  as . 

The  conditions  of  this  contract  of  insurance  are,  that  if  any  of 
the  buildings  used  for  manufacturing  purposes,  or  machinery  therein, 
shall  be  so  disabled  by  fire  occurring  during  the  term  and  under  the 
conditions  of  this  policy,  that  the  assured  are  entirely  prevented  from 
producing  goods,  then  this  Company  shall  be  liable  for  an  amount  not 

exceeding  .  dollars  per  day  for  each  working  day  of 

such  prevention  ;  and  in  case  said  buildings,  or  machinery  therein,  are 
so  disabled  by  fire  as  to  partially  prevent  the  production  of  goods,  this 
Company  shall  be  liable  per  day  for  not  exceeding  that  proportion  of 

. dollars  which  the  product  so  prevented  from  being 

made  bears  to  the  average  daily  yield  previous  to  the  fire,  which  for 
the  purposes  of  this  insurance  is  agreed  to  be  the  full  daily  average 

for . working  days  immediately  preceding  the  fire, 

not  exceeding  in  either  case  the  amount  insured. 

It  Will  Be  Noticed 

that  there  is  practically  no  difference  between  this  form  and 
the  one  first  considered  in  regard  to  total  prevention,  but  there 
is  quite  a  radical  difference  in  respect  of  partial  prevention. 
The  first  makes  the  “normal  production”  the  absolute  basis 
of  settlement  in  event  of  partial  cessation.  The  second  form 


13 


docs  not  make  the  “normal  production”  or  the  “average  daily 
yield”  the  absolute  basis  of  settlement,  but  simply  utilizes  the 
average  daily  yield  previous  to  the  fire  as  one  element  in 
determining  the  proportion  of  the  per  diem  limit  in  event  of 
partial  prevention. 

Under  the  first  form,  the -  “normal  production,” 

i.  e.,  the  average  daily  production  of  the  twelve  months  im¬ 
mediately  preceding  the  fire,  would  be  the  basis,  and  if,  as  has 
been  pointed  out,  the  actual  production  after  the  fire  equals 
or  exceeds  the  “normal  production,”  there  would  be  no  diminu¬ 
tion  of  the  agreed  production,  even  though  there  may  be  quite 
a  diminution  in  the  actual  production  as  the  result  of  the  fire. 

Under  the  second  form,  the  actual  productive  power  at 
time  of  the  lire  would  be  the  basis,  and  the  partial  prevention 
percentage  would  be  determined  by  the  relative  conditions 
which  prevail  at  the  time  of  and  after  the  fire,  taken  in  con¬ 
nection  with  the  average  daily  yield  prior  to  the  fire.  This 
may  not  be  quite  so  easy  of  ascertainment,  but  the  settlement 
will  be  fair  to  the  insured  in  each  and  every  instance.  It  is 
easily  conceivable  that  under  this  form,  a  claimant  might 
under  certain  conditions  be  able  to  collect  the  full  per  diem 
limit  in  case  of  partial  prevention.  This  might  happen  in 
event  of  a  partial  shut  down  as  the  result  of  a  very  severe 
fire  when  the  plant  was  running  greatly  in  excess  of  its  av¬ 
erage  capacity,  for  the  figures  might  show  a  partial  preven¬ 
tion  equal  to  or  in  excess  of  the  previous  average  daily  yield, 
and  this  would,  of  course,  call  for  the  payment  of  the  full  per 
diem  limit.  This,  however,  is  the  natural  sequence  in  all  cases 
of  under  insurance,  in  the  absence  of  co-insurance  or  average 
conditions. 

On  the  other  hand,  in  event  of  business  depression,  re¬ 
sulting  in  production  falling  below  the  average  for  the  pre¬ 
ceding  year  or  agreed  period,  the  amount  collectible  under 
the  second  form  might  be  less  than  that  collectible  under  the 
first. 

It  is  quite  apparent  that  in  this  latter  form,  the  element 
of  full  insurance,  which  is  supposed  to  be  embodied  in  use 
and  occilpancy  policies,  is  lost  to  the  company  by  reason  of 
the  condition  relating  to  partial  prevention  and  the  insured 
in  many  instances  may  be  correspondingly  benefited. 

This  form  might  possibly  be  improved  in  thought,  if  not 
in  diction,  by  changing  the  phraseology  so  as  to  make  it  read : 

“This  Company  shall  be  liable  per  day  for  no  greater  proportion 

of  not  exceeding . dollars  than  the  product  so  prevented 

from  being  made  bears  to  the  average  daily  yield  previous  to  the  fire.” 

As  it  now  reads,  the  limit  for  total  prevention  is  “not 

exceeding . dollars  per  day” — while  the  basis 

for  partial  prevention  is  a  certain  proportion  of  an  absolute 
fixed  amount. 


14 


Another  Form  In  Common  Use 

provides  that  the  company  shall  be  liable  for  such  proportion 
of  the  actual  loss  of  net  earnings  ensuing  from  the  use  and 
occupancy  of  the  premises  as  the  amount  insured  bears  to  the 
total  yearly  net  earnings  based  upon  the  daily  average  net 
earnings  immediately  preceding  the  fire.  It  also  provides  for 
the  ascertainment  of  net  earnings  by  deducting  all  manu¬ 
facturing  expenses  from  the  total  sales. 

All  the  forms  of  this  nature  which  have  come  to  my  at¬ 
tention  are  ambiguous  in  expression,  but  the  intent  is  evident. 
This  is  the  narrowest  form  of  use  and  occupancy  insurance, 
in  that  it  embraces  only  one  element,  to  wit,  net  profits.  It 
has,  however,  the  merit  of  including  in  its  provisions  the  prin¬ 
ciple  of  the  one  hundred  per  cent,  average  clause,  and  if  the 
cover  were  broadened — as  it  might  easily  be — and  the  phra¬ 
seology  improved,  it  would  make  one  of  the  fairest  conceivable 
forms  both  to  the  insurer  and  the  insured. 

The  name  “Use  and  Occupancy”  is  not  a  particularly 
happy  one,  and  many  attempts  have  been  made  to  find  a  more 
satisfactory  term  to  express  the  idea.  The  latest  suggestion 
is  “Business  Interruption  Indemnity”  and  a  prominent  com¬ 
pany  has  evolved  a  form  from  which  the  following  paragraphs 
are  taken  : 

“It  is  understood  and  agreed  that  the  term  ‘use  and  occupancy,' 
as  herein  used,  shall  he  construed  to  mean  net  profits  ;  general  main¬ 
tenance,  to  the  extent  of  taxes,  heating  and  lighting;  and  legal  liability 
of  assured  for  royalties  and  salaries  and  wages  of  employees  under 

contract,  as  follows : . 

. And  if  by  fire  occurring  during  the  period 

of  time  named  herein,  the  ability  to  produce  the  full  daily  average  of 
goods  be  impaired,  but  not  destroj^ed,  then  shall  this  company  be  liable 
per  day  for  said  actual  loss  sustained,  in  such  proportion  of  a  sum 

not  exceeding  $ .  as  the  product  so  prevented  from 

being  made  bears  to  the  full  daily  average  product,  it  being  under¬ 
stood  and  agreed  that  for  the  purpose  of  this  insurance  the  average 
daily  product  for  the  twelve  months  next  preceding  date  of  fire  will 
be  considered  the  full  daily  average  product.” 

The  idea  of  explaining  in  the  form  just  what  is  meant 
by  use  and  occupancy,  and  taking  net  profits  as  a  basis  and 
adding  thereto  various  items  of  continuing  expense,  is  a  most 
excellent  one.  This  may  not  embrace  all  the  items  which  cer¬ 
tain  applicants  may  desire,  but  any  omissions  can  be  easily 
supplied. 

As  under  one  of  the  other  forms  referred  to,  however, 
the  company  might  in  certain  circumstances,  be  called  upon 
to  pay  the  full  per  diem  limit  for  partial  prevention. 

In  Adopting  a  Name  for  Use  and  Occupancy  Insurance, 

the  originators  probably  had  in  mind  only  the  occupancy  of 
the  buildings  of  a  manufacturing  plant  and  the  use  of  the 
machinery  and  tools  therein.  Many  forms  still  restrict  the 
insurance  to  buildings  and  machinery,  while  others  include 
stock  and  still  others  use  the  broader  term  “contents.”  It  has 


15 


been  suggested  that  such  a  form  might  include  the  profit  on 
manufactured  stock  when  it  provides  for  indemnity  in  case 
the  insured  is  prevented  from  “carrying  on  his  business”  as 
distinguished  from  “producing  goods,”  the  theory  being  that 
the  only  “use”  a  manufacturer  has  for  finished  goods  “in 
carrying  on  his  business,”  is  to  sell  them  and  make  a  profit 
thereon.  In  fact,  this  is  the  exact  praseology  used  in  connec¬ 
tion  with  insurance  on  department  stores  and  other  non-manu¬ 
facturing  property,  the  main  feature  of  which  is  profit  on 
sales.  These  words  should  not  be  used  in  policies  covering 
manufacturing  risks,  and  profits  on  manufactured  goods 
should  be  insured  as  such. 

Raw  material  and  constituent  parts  which  come  under 
the  general  description  of  stock  are  important  elements  in 
manufacturing,  and  the  destruction  of  some  ingredient  or  part 
might  interfere  very  materially  with  the  entire  process,  just 
as  effectually  as  the  burning  of  the  picker  room  of  a  cotton 
mill  or  the  power  house  of  any  plant ;  hence,  raw  stock  as  a 
factor  in  production,  is  a  perfectly  legitimate  item  in  connec¬ 
tion  with  this  class  of  insurance. 

Although  use  and  occupancy  insurance  is  most  frequently 
written  to  cover  manufacturing  risks,  yet  it  is  used  in  con¬ 
nection  with  department  stores,  mercantile  risks  and  other 
property  of  a  non-manufacturing  nature.  When  written  on 
mercantile  risks  the  forms  are  varied  somewhat,  the  phrase 
“producing  goods”  giving  way  to  “transacting  their  business” 
and  the  expression  “production  of  goods”  to  “gross  sales.” 
In  other  respects,  the  phraseology  is  very  much  the  same  as 
that  used  in  connection  with  manufacturing  risks. 

The  Most  Remarkable  and  Ingenious  Form 

which  has  come  to  my  attention  has  recently  made  its  ap¬ 
pearance.  It  covers  the  use  and  occupancy  of  a  department 
store,  mentioning  building  and  contents,  and  has  a  tabulated 
sliding  scale  agreement  fixing  the  basis  of  per  diem  liability 
for  each  month  in  the  year,  said  liability  for  prevention  during 
each  of  the  respective  months  (varying  as  such  month  may 
be  the  first,  second,  third,  etc.,  up  to  the  twelfth),  of  total  or 
partial  prevention. 

It  also  provides  that  the  policy  shall  pay  such  proportion 
of  the  per  diem  limits  named,  as  the  amount  of  the  policy 
bears  to  a  stated  amount,  say  $50,000.00,  this  being  the  max¬ 
imum  amount  payable  even  if  the  period  of  prevention  should 
be  the  full  twelve  months.  This  feature  on  its  face  looks 
good,  but  according  to  the  table,  if  a  fire  should  occur,  say  on 
the  first  day  of  the  busiest  month,  causing  total  prevention 
for  one  month,  the  loss  to  the  companies  would  be  about 
22%;  for  two  months  37%;  for  three  months  50%,  and  for 
six  months  the  insurers  might  possibly  have  a  loss  of  85%. 
These  results  are  about  the  same  as  they  would  be  under  an 
ordinary  policy  where  the  insurance  carried  amounts  to  from 


16 


forty  to  sixty  per  cent,  of  the  value;  hence,  that  which  at 
first  glance  has  every  appearance  of  being  full  insurance,  or 
over  insurance,  operates  practically,  under  the  conditions  of 
the  contract,  as  very  pronounced  under  insurance. 

The  Question  Is  Frequently  Asked — 

what  period  preceding  the  fire  should  be  taken  as  the  basis 
of  adjustment  in  case  of  partial  prevention?  Some  forms 
provide  for  settlement  on  the  basis  of  the  average  daily  yield 
for  three  hundred  working  days  immediately  preceding  the 
fire ;  some  on  the  basis  of  the  average  daily  yield  for  the 
previous  six  months,  and  some  for  the  previous  three  months ; 
some  from  the  time  the  policy  is  issued  until  the  date  of  the 
fire;  some  for  the  corresponding  season  in  the  twelve  months 
immediately  preceding  the  fire,  and  some  on  the  basis  of  a 
stated  amount. 

It  might  be  supposed  that  the  greater  the  normal  or  av¬ 
erage  daily  yield  for  the  agreed  period  preceding  the  fire,  the 
better  it  would  be  for  the  insured,  and  conversely,  the  less 
the  normal  or  average  daily  yield,  the  better  it  would  be  for 
the  insurer.  Under  one  class  of  forms  which  we  have  been 
considering,  this  conclusion  is  correct,  but  under  another, 
just  the  reverse  is  true.  Therefore,  a  broker  or  agent  who  is 
desirous  of  adopting  a  basis  which  will  be  most  advantageous 
to  his  client,  would  do  well  to  first  consider  the  form  in  con¬ 
nection  with  its  relation  to  partial  prevention,  for  that  is 
where  the  difference  lies. 

Several  attempts  have  been  made  on  the  part  of  com¬ 
panies  to  adopt  a  standard  form  or  set  of  forms  for  use  and 
occupancy  insurance,  but  all  efforts  in  this  direction  have 
failed,  probably  for  the  same  reason  that  this  is  apparently 
impossible  of  accomplishment  in  respect  of  other  classes  of 
insurance.  In  the  first  place,  the  peculiar  conditions  con¬ 
nected  with  one  man’s  business  differ  materially  from  those 
surrounding  the  business  of  another,  and  different  forms  are 
needed  to  meet  their  respective  requirements ;  and  further¬ 
more,  standard  forms  which  might  meet  the  needs  of  a  large 
majority  of  use  and  occupancy  insurers  much  better  than  the 
miscellaneous  aggregation  now  in  use,  would  interfere  with 
the  ingenuity  of  the  broker,  for,  as  one  star  differeth  from 
another  in  glory,  so  does  one  broker’s  form  differ  from  that 
of  his  rival  in  point  of  desirability,  in  his  own  opinion  at 
least,  although  this  opinion  is  ofttimes  subject  to  revision 
after  a  loss  has  occurred. 

Inasmuch  as  the  only  courts  which  have  rendered  any 
decisions  bearing  on  the  subject  of  Use  and  Occupancy  insur¬ 
ance,  have  declared  that  it  does  not  cover  profits  nor  fixed 
charges,  and  one  has  gone  so  far  as  to  say  that  profits,  which 
are  always  an  uncertain  element  and  speculative  to  a  certain 
extent,  do  not  even  form  any  basis  for  calculating  the  market 


17 


_ 


value  of  the  use  and  occupancy  of  a  plant  (Tannenbaum  vs. 
Simon,  81  N.  Y.  Supp.,  655),  it  would  seem  desirable  to  have 
the  form  clearly  set  forth  exactly  what  is  intended  to  be 
covered. 

The  Court  of  Appeals,  in  the  Michael  case,  very  properly 
said  that  the  defendant  might  have  avoided  all  questions  of 
construction  if  it  had  plainly  stated  that  the  business  of  the 
plaintiff,  or  its  earnings  or  profits,  was  the  subject  of  insur¬ 
ance  instead  of  using  such  a  vague  term  as  Use  and  Occu¬ 
pancy.  Although  the  subject  has  engaged  the  attention  of 
some  of  the  best  minds  in  the  business, 

The  Ideal  Form  Has  Not  Yet  Been  Prepared. 

Virtually  all  of  those  in  current  use  contain  some  excellent 
features,  and  unless  there  is  some  material  increase  or  decrease 
in  the  business  activity  of  the  insured,  adjustments  made 
thereunder  ought  to  be  reasonably  satisfactory  to  all  parties 
in  interest. 


18 


The  Interest  of  a  Mortgagee  under  a 

Policy  of  Fire  Insurance 

A  LECTURE 

DELIVERED  BEFORE 

The 

Fire  Insurance  Society 

of  Philadelphia 
March  19tli,  1917 

BY 

W.  N.  BAMENT 

General  Adjuster 

(®ej 


THE  HOME  INSURANCE  COMPANY 

NEW  YORK 


The  Interest  of  a  Mortgagee  Under 
a  Policy  of  Fire  Insurance 

m  _ 

William  N.  Bament,  General  Adjuster 
The  Home  Insurance  Company,  New  York 


When  it  is  considered  that  fully  sixty  per  cent,  of  all 
the  real  estate  in  this  country  is  encumbered  to  a  greater  or 
less  extent  by  mortgage,  and  that  the  lenders  of  money  thereon 
almost  invariably  insist  upon  having  the  improvements  cov¬ 
ered  by  policies  of  fire  insurance,  payable  to  them  as  collateral 
security,  it  is  at  once  apparent  that  the  subject  of  this  address 
is  one  of  exceedingly  great  interest  to  the  vast  number  of 
corporations  and  individuals  who  loan  money  on  real  estate 
and  of  scarcely  less  interest  to  the  underwriters  who  issue 
policies  thereon. 

It  has  been  the  aim  of  insurance  companies  to  meet  the 
peculiar  requirements  of  these  mortgagees  in  respect  of  insur¬ 
ance,  by  giving  them  special  forms  of  contract,  exceedingly 
liberal  in  their  terms ;  and  in  so  doing  they  have,  in  some 
instances,  gone  to  unreasonable  lengths  and  far  beyond  what 
was  originally  contemplated  in  protecting  said  interests.  And 
in  the  light  of  the  interpretations  which  have  been  placed  upon 
the  provisions  in  favor  of  the  mortgagees,  it  will  be  perfectly 
safe  to  say  that  if  there  is  a  more  highly  favored  party  to  any 
contract  than  a  mortgagee  under  a  policy  of  fire  insurance,  he 
has  not  yet  been  discovered.  Whenever  he  has  asked  he  has 
received,  whenever  he  has  sought  he  has  found  and  whenever 
he  has  knocked  it  has  been  opened  unto  him  either  by  the 
insurers  themselves  or  by  the  courts,  for  what  the  former 
have  omitted  the  latter  have  supplied. 

In  Maine,  Massachusetts,  Mississippi  and  North  Carolina, 
the  mortgagee  has,  by  statute,  under  certain  conditions,  a  lien: 
against  the  insurance  money  due  the  mortgagor.  In  Louisiana 
a  clause  is  used,  making  loss,  if  any,  payable  to  the  holder  or 
holders  of  the  mortgage  notes.  In  New  York  City  the  loss  is 
made  payable  to  the  original  mortgagee,  or  the  owner  of  the 
mortgage  at  the  time  of  the  fire,  the  former,  however,  agree¬ 
ing  upon  request  to  inform  the  insurer  of  the  name  and  ad- 


1 


dress  of  the  party  to  whom  it  may  have  been  assigned.  In 
New  England  the  loss  is  made  payable  to  the  mortgagee  as 
his  interest  may  appear  under  present  and  all  future  mortgages 
covering  the  premises.  In  the  West  the  loss  is  made  payable 
to  the  mortgagee  or  his  assigns.  In  Canada  the  policy  is 
continued  in  force  for  the  benefit  of  the  mortgagee  after  ex¬ 
piration,  and  until  the  mortgagee  or  the  insurer  serves  notice 
of  cancellation ;  the  mortgagee,  however,  being  liable  for  the 
premium  for  the  extended  period.  In  Mississippi  the  stand¬ 
ard  mortgagee  clause  is  written  into  the  policy  by  operation 
■of  law.  Sec.  2596  of  Code — Bacot  vs.  Phenix  Ins.  Co.,  96 
Miss.  223,  50  So.  Rep.  729. 

If  a  mortgage  contains  an  agreement  that  the  mortgagor 
shall  keep  the  mortgaged  property  covered  by  insurance  for 
the  benefit  of  the  mortgagee,  and  for  any  reason  he  fails  to 
have  the  loss  made  payable  to  him,  the  mortgagee  has  an 
equitable  lien  against  any  insurance  that  the  mortgagor  may 
have,  and  if  the  insurer  receives  notice  of  such  lien  before 
making  payment  he  will  ignore  it  at  his  peril.  Wheeler  vs. 
Insurance  Co.,  101  U.  S.  439;  Aetna  Ins.  Co.  vs.  Thompson, 
68  N.  H.  20,  40  Atl.  396;  Swearingen  vs.  Hartford  Eire  Ins. 
Co.,  52  S.  C.  309,  29  S.  E.  722,  56  S.  C.  355,  34  S.  E.  449. 

In  several  states  it  has  been  held  that  the  short  form 
“loss  payable”  clause  is  nothing  more  or  less  than  an  uncon¬ 
ditional  agreement  to  pay  the  mortgagee  in  event  of  loss,  and 
if  there  are  any  privileges  and  advantages  he  does  not  possess, 
it  is  either  because  he  has  not  yet  thought  of  them  or  has  not 
■demanded  them.  And  more  remarkable  still  is  the  fact  that 
for  all  this  the  mortgagee  pays  nothing  whatever.  He  gets 
without  money  and  without  price  a  contract  which  the  mort¬ 
gagor  or  owner  of  the  best  risk  in  the  land  cannot  buy  at  any 
price. 

The  mortgagee,  however,  is  entitled  to  absolute  protec¬ 
tion  from  acts  and  conditions  outside  his  knowledge  and 
beyond  his  control,  and  if  the  insurer  is  willing  to  grant  this 
protection  without  extra  premium,  no  criticism  can  attach  to 
the  mortgagee  if  he  gracefully  accepts  the  benefits  thus  gen¬ 
erously  bestowed.  In  fact,  the  writer  entertains  the  hope, 
perhaps  a  forlorn  one,  that  some  time  he  himself  may  emerge 
from  his  normal  condition  of  mortgagor  and  become  a  mem¬ 
ber  of  the  mortgagee  class  with  its  attendant  benefits. 

In  the  year  1858  the  large  insurance  companies  and  other 
loaning  institutions  received  quite  a  severe  shock  and  rather 
a  rude  awakening  by  two  decisions  which  were  handed  down 
4>y  the  Court  of  Appeals  of  New  York.  Prior  to  that  time, 
hy  reason  of  decisions  rendered  in  1832  and  1851,  it  had  been 
their  custom  to  accept  fire  insurance  policies  as  collateral 
security  with  the  short  form  clause  “Loss,  if  any,  payable  to 

. .  mortgagees  as  their  interest  may 

appear,”  or  to  have  the  policies  assigned  to  them  for  collateral 
purposes  with  the  consent  of  the  insurers,  in  the  belief  that 


2 


their  interests  could  not  be  adversely  affected  by  any  act  or 
neglect  on  the  part  of  the  mortgagor  or  owner. 

The  decisions  referred  to  are  Grosvenor  vs.  Atlantic  Fire 
Insurance  Co.  (17  N.  Y.  391)  and  Buffalo  Steam  Engine 
Works  vs.  Sun  Mutual  Insurance  Co.  (17  N.  Y.  401).  The 
former  was  a  case  involving  the  “loss  payable”  clause  and  the 
latter  one  involving  an  assignment  of  the  policy  to  the  mort¬ 
gagee,  the  Court  in  both  instances  holding  that  the  mortgagee 
was  merely  the  appointee  of  the  party  insured,  to  receive  the 
money  which  might  become  due  him  from  the  insurers  upom 
the  contract ;  that  the  “loss  payable”  provision  in  the  policy 
in  favor  of  the  mortgagee  had  no  more  effect  upon  the  con¬ 
tract  than  it  would  if  it  had  provided  that  the  loss  for  which 
the  insurer  should  become  liable  should  be  deposited  in  a 
specified  bank  to  the  credit  of  the  party  insured.  The  rule  of 
construction  thus  adopted  by  the  New  York  Court  was  fol¬ 
lowed  in  other  jurisdictions  and  naturally  spread  consterna¬ 
tion  among  the  large  lenders  of  money  on  real  estate,  because 
the  security,  which  they  had  hitherto  regarded  as  absolute, 
was  by  these  sweeping  decisions  found  to  depend  upon  con¬ 
ditions  of  which  they  had  no  knowledge  and  over  which  they 
had  no  control.  This  situation  was  of  course  intolerable  and 
it  became  necessary  for  mortgagees  either  to  take  out  special 
policies  of  insurance  covering  their  mortgage  interests  or 
secure  some  special  form  of  contract  in  their  favor  to  attach 
to  the  policies  of  the  property  owners.  The  outcome  was  the 
adoption  of  a  special  mortgagee  agreement,  substantially  the 
same  as  the  present  standard  mortgagee  clause,  which,  how¬ 
ever,  did  not  come  into  general  use  until  some  years  later. 

In  the  year  1886  the  New  York  Standard  Fire  Insurance 
Policy  was  adopted  by  the  legislature  of  that  state,  together 
with  a  number  of  permissible  riders,  among  which  were  three 
mortgagee  agreements,  one  known  as  the  “New  York  Stand¬ 
ard  Mortgagee  Clause  without  Contribution,”  another  the 
“New  York  Standard  Mortgagee  Clause  with  Full  Contribu¬ 
tion”  and  a  third  the  “New  York  Standard  Mortgagee  Clause 
when  owner  has  no  interest  in  the  insurance.”  The  first  two 
are  exactly  the  same  in  phraseology,  except  that  one  contains 
the  contribution  clause,  which  reads  as  follows : 

“In  case  6f  any  other  insurance  upon  the  within  described  prop¬ 
erty,  this  Company  shall  not  be  liable  under  this  policy  for  a  greater 
proportion  of  any  loss  or  damage  sustained  than  the  sum  hereby  in¬ 
sured  bears  to  the  whole  amount  of  insurance  on  said  property,  issued 
to  or  held  by  any  party  or  parties  having  an  insurable  interest  therein, 
whether  as  owner,  mortgagee  or  otherwise.” 

This  contribution  clause  has  been  the  subject  of  two 
leading  cases  of  absorbing  interest  in  insurance  litigation,  to 
which  attention  will  be  directed  later. 

Two  of  these  mortgagee  clauses  provide  that  the  interest 
of  the  mortgagee  shall  not  be  invalidated  by  any  act  or  neglect 
of  the  mortgagor  or  owner,  nor  by  foreclosure  proceedings. 


3 


change  of  title  or  ownership,  or  increase  of  hazard,  provided 
the  mortgagee  shall  notify  the  company  of  such  changes  or 
increase  in  hazard  as  may  come  to  his  knowledge,  and  pay 
premium  therefor  and  provided  also  that  the  mortgagee  shall 
pay  the  premium  in  event  of  default  by  the  owner ;  also  for 
cancellation  and  for  subrogation  in  event  of  non-liability  to 
the  mortgagor  or  owner. 

The  third  mortgagee  clause  is  intended  for  use  where  the 
policy  is  issued  direct  to  the  mortgagee  covering  his  interest 
only,  and  contains  a  provision  for  subrogation.  This  latter 
clause  is  seldom  used,  but  if  a  policy  is  issued  direct  to  the 
mortgagee,  he  is  “the  insured”  and  is  bound  by  all  the  terms 
and  conditions  of  the  policy. 

The  New  York  Standard  Policy  and  its  collateral  agree¬ 
ments  have  been  formally  adopted  by  a  number  of  other  states 
either  verbatim  or  with  slight  modifications,  while  others 
have  adopted  standard  forms  differing  materially  therefrom, 
but  it  is  safe  to  say  that  in  all  the  United  States,  aside  from 
those  which  have  standard  policies  of  their  own,  fully  seventy- 
five  per  cent,  of  the  policies  issued  are  the  New  York  Stand- 
raT.d.  It  would  seem  that  this  approach  to  uniformity  in  con¬ 
tract  should  be  attended  with  something  approaching  uniform¬ 
ity  in  court  decisions,  but  such  is  not  the  case,  because  the 
-courts  of  the  various  states  differ  with  each  other  on  many 
points  and  the  federal  courts  have  differed  radically  with  the 
New  York  Court  of  Appeals  in  the  interpretation  of  several 
wery  important  conditions,  one  of  which  bears  directly  upon 
the  interest  of  the  mortgagee. 

The  storm  center  of  most  of  the  litigation  which  has 
taken  place  in  connection  with  the  interest  of  the  mortgagee 
is  to  be  found  in  lines  56  to  59  of  the  policy,  which  read  as 
follows : 

“If,  with  the  consent  of  this  company,  an  interest  under  this  policy 
shall  exist  in  favor  of  a  mortgagee  or  of  any  person  or  corporation 
having  an  interest  in  the  subject  of  insurance  other  than  the  interest 
of  the  insured  as  described  herein,  the  conditions  hereinbefore  contained 
shall  apply  in  the  manner  expressed  in  such  provisions  and  conditions 
of  insurance  relating  to  such  interest  as  shall  be  written  upon,  attached 
or  appended  hereto.” 

This  paragraph  has  been  to  some  courts  a  stumbling 
block  and  to  others  foolishness,  and  if  it  were  not  in  the 
policy,  or  if  the  intention  of  its  authors  had  been  more 
•clearly  expressed,  much  of  the  litigation  which  has  taken 
place  would  have  been  avoided. 

There  are  three  leading  cases  involving  the  question  of 
contribution  under  the  mortgagee  clause,  two  by  the  New 
York  Court  of  Appeals  and  one  by  the  United  States  Circuit 
Court  of  Appeals. 

The  first  is  that  of  Hastings  vs.  Westchester  (73  N.  Y. 
141)  decided  by  the  New  York  court  in  1878.  One  policy, 
.the  Westchester,  was  issued  to  the  owner  with  loss  payable 


4 


to  the  mortgagee;  the  other,  the  Lycoming,  was  issued  to 
the  insured  with  loss  payable  to  himself.  The  mortgagee 
clause  itself  did  not  contain  any  provision  for  contribution, 
and  the  company  relied  upon  the  contribution  clause  in  the 
printed  conditions  of  the  policy.  Suit  was  brought  against 
the  Westchester  by  the  mortgagee,  who  claimed  the  full 
amount  of  loss  from  that  company.  The  court  held  that  by 
reason  of  the  mortgagee  clause,  the  policy  operated  as  an 
independent  insurance  of  the  mortgagee’s  interest  and  that 
the  Westchester  was  liable  for  the  full  amount  of  the  loss, 
but  was  entitled  to  subrogation,  for  what  it  might  be  worth, 
to  the  extent  of  the  excess  which  it  was  compelled  to  pay 
over  and  above  its  pro  rata  liability  to  the  insured.  Whether 
the  Westchester,  by  reason  of  its  subrogation  rights,  could, 
for  its  indemnity,  have  any  recourse  against  the  proceeds  of 
the  policy  in  the  Lycoming  Insurance  Company  was  a  ques¬ 
tion  which  the  court  did  not  feel  called  upon  to  decide,  and 
no  court  has  attempted  to  do  so  since.  The  question  did  not 
come  up  again  for  sixteen  years,  but  in  the  same  month  of 
the  same  year,  to  wit:  October,  1894,  the  New  York  Court 
of  Appeals  decided  the  case  of  Eddy  vs.  London  Assurance 
Corporation  et  al.  (143  N.  Y.  311)  and  the  United  States 
Circuit  Court  of  Appeals  rendered  its  decision  in  the  case  of 
Williams,  Trustee,  vs.  Hartford  Fire  Insurance  Co.  (63  Fed. 
925),  both  involving  the  question  of  contribution  under  the 
mortgagee  clause. 

It  will  be  remembered  that  in  the  case  of  Hastings  vs. 
Westchester  the  mortgagee  agreement  did  not  contain  the 
contribution  clause.  In  the  Eddy  case  some  policies  contained 
the  mortgagee  clause  with  full  contribution  and  some  con¬ 
tained  the  clause  without  contribution,  while  others  were 
payable  direct  to  the  insured.  In  the  Williams  case  the 
policy  contained  the  mortgagee  clause  with  full  contribution 
so  that,  with  respect  to  the  clause  with  full  contribution,  the 
two  cases  were  on  all  fours  with  each  other,  yet  these  two 
courts  of  last  resort  reached  diametrically  opposite  con¬ 
clusions,  neither  knowing  the  views  of  the  other. 

The  lines  of  reasoning  adopted  by  these  eminent  tribunals 
in  reaching  their  respective  decisions  will  be  found  interest¬ 
ing.  The  New  York  Court  said  that  the  words  “the  interest 
of  the  mortgagee  shall  not  be  invalidated”  should  not  be 
given  a  narrow,  but  on  the  contrary,  a  broad  interpretation, 
and  meant  that  the  interest  of  the  mortgagee  should  not  be 
injuriously  impaired  or  affected  by  the  act  or  neglect  of  the 
owner ;  that  in  order  to  constitute  double  insurance,  the  poli¬ 
cies  must  cover  the  same  interest  in  the  same  property .  or 
some  part  thereof;  that  although  the  contribution  provision 
was  inserted  as  a  part  of  the  mortgagee  clause,  and  called 
for  contribution  from  the  whole  insurance  on  the  property 
held  by  any  party  or  parties  having  an  insurable,  interest 
therein,  whether  as  owner,  mortgagee  or  otherwise,  this 


5 


provision  was  inconsistent  with  the  primary  promise  that  the 
interest  of  the  mortgagee  should  not  be  impaired  by  the  act 
or  neglect  of  the  owner  and  that  the  primary  promise  must 
prevail.  The  court  admitted  that  this  view  might  not  give 
full  effect  to  the  strict  language  of  the  contribution  clause, 
but  held  that  taking  the  contract  as  a  whole,  it  was  unreason¬ 
able  to  suppose  that  the  parties  intended  to  permit  the  interest 
of  the  mortgagee  to  be  adversely  affected  by  the  secret  act 
of  a  third  party,  and  that  the  contribution  clause  must  be 
limited  in  its  operations  to  the  insurance  held  by  or  con¬ 
sented  to  by  the  mortgagee. 

The  Federal  Court,  in  its  decision,  said  that  the  particular 
language  employed  in  the  mortgagee  clause  respecting  con¬ 
tribution,  seems  to  have  been  inserted  for  the  express  purpose 
of  making  it  clear  that  the  mortgagee’s  policy  was  entitled 
to  pro  rate  with  all  policies  covering  the  property  which  at 
the  time  of  the  loss  might  be  held  by  any  person  whomsoever 
had  an  insurable  interest  in  the  property.  In  the  absence 
of  the  words  “issued  to  or  held  by  any  party  or  parties  having 
an  insurable  interest  therein,”  it  might  no  doubt  be  fairly 
argued  that  it  was  simply  the  intention  of  the  parties  to 
reserve  the  right  to  pro  rate  with  other  policies  procured 
by  the  mortgagee  for  the  protection  of  his  interest,  but  the 
use  of  the  words  quoted  rendered  that  construction  inad¬ 
missible.  Those  words  appear  to  have  been  added  out  of 
abundant  caution  that  there  might  not  be  any  room  for  doubt 
on  the  subject.  The  court  further  said  that  it  would  not  be 
justified  in  ignoring  an  agreement  in  one  part  of  the  instru¬ 
ment,  which  is  as  clearly  expressed  as  language  could  well 
express  it,  merely  because  it  limits  to  some  extent  the  scope 
of  general  language  employed  in  another  part  of  the  instru¬ 
ment.  It  further  surmised  what  is  undoubtedly  true,  that 
the  contribution  clause  was  phrased  precisely  as  it  is,  and 
inserted  as  a  part  of  the  mortgagee  clause  itself  for  the  pur¬ 
pose  of  remedying  the  defect  brought  out  in  the  case  of 
Hastings  vs.  Westchester,  and  for  the  sole  purpose  of  secur¬ 
ing  the  contribution  which  was  denied  in  that  case. 

Two  courts  of  such  prominence  having  differed  with 
each  other,  the  question  which  naturally  presents  itself  is, 
which  is  the  better  law  ?  Although  the  mortgagee  should 
have  absolute  protection  in  the  matter  of  his  insurance,  un¬ 
affected  by  the  acts  of  omission  or  commission  on  the  part 
of  third  persons,  and  while  it  is  true  that  under  the  inter¬ 
pretation  placed  upon  the  contribution  clause  by  the  Federal 
Court,  his  interest  might  in  certain  circumstances  be  very 
materially  impaired,  yet,  to  use  a  favorite  expression  of  the 
judiciary,  it  is  the  province  of  the  courts  to  construe  con¬ 
tracts,  not  to  make  them,  but  it  seems  that  the  New  York 
Court  of  Appeals  in  the  Eddy  case  went  out  of  its  way  to 
amend  the  existing  contract  by  virtually  eliminating  there¬ 
from  the  words  “issued  to  any  party  or  parties  having  an 


6 


f 


insurable  interest  therein/’  There  is  no  ambiguity,  no  lan¬ 
guage  could  be  plainer  and  it  is  impossible  to  conceive  of  any 
object  that  the  parties  could  have  had  in  using  those  words 
other  than  to  avoid  the  very  construction  of  the  clause  which 
the  Court  of  Appeals  adopted. 

The  Federal  decision  was  legally  sound,  but  the  contri¬ 
bution  provision  contained  in  the  standard  mortgagee  clause 
is  not  fair  to  the  mortgagee,  and  it  should  be  amended  so  as  to 
permit  contribution  from  those  policies  only,  which  are  pay¬ 
able  to,  held  by  or  consented  to  by  the  mortgagee ;  for  other¬ 
wise  he  will  not,  in  many  instances,  have  the  security  to 
which  he  is  justly  entitled. 

A  short  time  after  the  standard  policy  went  into  general 
use,  the  insurance  companies  and  the  framers  thereof  received 
about  as  great  a  shock  as  the  mortgagees  had  received  years 
before,  the  occasion  being  a  remarkable  decision  rendered  by 
the  Supreme  Court  of  Nebraska  in  the  case  of  Oakland  Home 
Ins.  Co.  vs.  Bank  of  Commerce  (47  Neb.  717),  in  which  it 
was  held  that  under  the  short  form  “loss  payable”  clause, 
the  mortgagee  is  not  bound  by  any  of  the  conditions  of  the 
policy  whatsoever.  According  to  the  interpretation  placed 
by  the  court  upon  lines  56  to  59,  if  the  company  desired  any 
of  the  policy  conditions  to  apply  to  the  interest  of  the  mort¬ 
gagee,  it  would  be  necessary  for  those  conditions  to  be  spe¬ 
cially  written  upon,  attached  or  appended  to  the  rider,  and 
inasmuch  as  no  conditions  were  so  appended,  or  included  in 
the  “loss  payable”  clause,  the  mortgagee  virtually  possessed 
an  unconditional  contract,  and  in  the  absence  of  fraud  on  his 
part  the  company  had  no  alternative  but  to  pay  the  loss. 
The  court  commenting  upon  lines  56  to  59  used  the  following 
language : 

“And  even  if  there  be  doubt  as  to  the  correctness  of  this  con¬ 
struction,  there  is  some  satisfaction  in  the  fact  that  an  insurer  who 
puts  such  a  nondescript  provision  into,  his  policy  should  hardly  be 
heard  to  object  to  any  kind  of  construction  which  any  one  chooses 
to  give  it.” 

Six  other  states,  to  wit :  Mississippi,  Iowa,  Washington, 
Missouri,  California  and  Ohio  have  rendered  similar  decisions. 
Several  judges  dissented  and  Mr.  Freeman,  the  learned  anno¬ 
tate^  says  that  these  cases  go  to  the  extreme,  if  not  ques¬ 
tionable,  limit,  in  upholding  the  rights  of  the  mortgagee, 
where  there  is  no  clause  in  the  policy  securing  the  mortgagee 
against  any  act  or  neglect  of  the  mortgagor — East  vs.  New 
Orleans  Ins.  Assn.  76  Miss.  697,  26  So.  Rep.  691 ;  Christenson 
vs.  Fidelity  Ins.  Co.  117  Iowa  77,  90  N.  W.  495,  94  Am.  St. 
Rep.  286;  Boyd  vs.  Thuringia  Ins.  Co.  25  Wash.  447,  65  Pac. 
785,  55  L.  R.  A.  165 ;  Senor  et  al.  vs.  Western  Millers  Mut.  F. 
Ins.  Co.  181  Mo.  104,  79  S.  W.  685,  33  Ins.  Law  Journal  455; 
Welch  vs.  British  America  Assur.  Co.  (Cal.)  82  Pac.  964; 
Farmers  Natl.  Bank  vs.  Delaware  Ins.  Co.  (Ohio)  83  O.  S. 
309,  40  Ins.  Law  Journal  1248. 


7 


According  to  these  decisions  it  is  quite  evident  that  in 
those  particular  states  the  short  “loss  payable”  clause  is  much 
more  favorable  to  the  mortgagee  than  the  standard  mortgagee 
clause  itself,  for  the  latter  does  reserve  some  few  rights  to 
the  insurer,  while  the  former  reserves  none. 

Various  suggestions  have  been  made  as  to  how  the  “loss 
payable”  clause  should  be  amended  so  as  to  meet  the  condi¬ 
tions  brought  about  by  these  decisions,  and  in  this  connection 
it  is  important  to  note  that  in  none  of  the  cases  referred  to 
did  the  clause  contain  any  reference  to  the  conditions  of  the 
policy. 

The  following  has  been  suggested :  “Loss,  if  any,  payable 
to . . . mortgagee,  as  interest  may  appear,  sub¬ 

ject,  nevertheless,  to  all  the  conditions  of  this  policy,”  but 
this  has  been  objected  to  on  the  ground  that  on  its  very  face 
it  creates  a  distinct  contract  with  the  payee,  which  it  is 
desirable  to  avoid,  and  the  answer  to  this  criticism  is  that 
the  several  courts,  whose  opinions  we  have  been  considering, 
have  practically  decided  that  lines  56  to  59  of  the  policy  have 
that  effect  as  soon  as  a  “loss  payable  clause”  is  placed  on  the 
policy.  And,  although  a  mortgagee  under  the  “loss  payable” 
clause  is  not  an  “insured,”  yet  the  New  York  Court  of  Appeals 
has  ruled  that  he  is  bound  by  all  the  policy  conditions  prior 
to  line  56,  but  is  not  bound  by  those  after  line  60.  MacDowell 
vs.  St.  Paul  F.  &  M.  Ins.  Co.,  207  N.  Y.  472.  And  all  courts 
without  exception  which  have  passed  on  the  question  (and 
they  are  numerous)  have  held  that  the  mortgagee,  payee,  is 
entitled  to  notice  of  cancellation. 

Another  objection  is  that  by  making  the  policy  subject 
to  all  the  conditions  of  the  policy,  we  simply  reaffirm  lines 
56  to  59,  which  brings  us  back  to  where  we  started  from. 
It  is  possible,  however,  that  under  the  form  suggested  the 
courts  might,  notwithstanding,  render  their  decisions  in  ac¬ 
cordance  with  the  manifest  intention  of  the  parties. 

Another  suggestion  is : 

“Any  loss  which  may  be  ascertained  to  be  due  the  assured  under 

this  policy,  shall  be  held  payable  to . as  interest  may 

appear.  It  being  understood  and  agreed  that  there  is  no  contract  under 

this  clause  or  policy  with . except  as  relating  to  the 

payment  of  money  due  the  assured . ” 

And  still  another  is : 

“Loss,  if  any,  payable  to . as  interest  may  appear. 

This  endorsement  shall  be  held  to  vest  in  said  payee  no  right  or 
interest  in  this  insurance  save  as  the  appointee  to  receive  the  amount, 
if  any,  which  may  become  due  the  assured  hereunder,  in  the  event  of 
loss,  any  condition  of  the  policy  to  the  contrary  notwithstanding.” 

The  latest  suggestion  is  as  follows : 

“It  is  hereby  agreed  that  such  loss  or  damage  as  shall  have  been 
ascertained  and  proved  to  be  dud  under  all  the  conditions  of  the  within 

policy  to . . (which  conditions  are  hereby  by  reference 

incorporated  into,  and  made  applicable  to  the  payee  herein  named  as  a 
part  of  this  agreement  as  fully  as  though  written  at  length  herein), 
shall  be  held  payable  unto . ” 


8 


But  no  simple  “loss  payable”  clause  has  as  yet  been 
devised  which  can  secure  universal  endorsement  and  at  the 
same  time  meet  the  requirements  of  lines  56  to  59  of  the 
standard  policy  as  interpreted  by  many  of  the  courts. 

The  State  of  California  has  solved  the  difficulty  in  its 
standard  policy  by  leaving  out  the  paragraph  contained  in 
lines  56  to  59  and  this  is  probably  the  simplest  and  most 
effectual  way  of  remedying  the  defect.  It  has  also  been  left 
out  of  the  new  standard  policies  recently  adopted  by  the  states 
of  Pennsylvania,  North  Carolina  and  South  Carolina.  This, 
of  course,  could  not  be  done  except  in  non-standard  policy 
states. 

In  striking  contrast  to  the  foregoing  decisions  may  be 
mentioned  the  case  of  the  Atlas  Reduction  Co.  vs.  New 
Zealand  Insurance  Co.,  decided  by  the  United  States  Circuit 
Court  of  Appeals,  Eighth  Circuit,  April  24,  1905.  The  policy 
covered  both  the  realty  and  personalty  and  contained  the 
following  clause:  “Subject  to  all  the  conditions  of  this  policy, 
loss,  if  any,  payable  to  G.  B.  Dodge  and  A.  M.  Stevenson, 
as  their  interest  may  appear,”  two  mortgages,  one  of  the 
realty  and  the  other  of  the  chattels  having  been  executed  by 
the  Reduction  Company.  It  was  held  that  the  endorsement 
is  a  common  method  of  furnishing  security  to  a  creditor, 
but  does  not  make  a  new  contract  with  the  payee,  or  waive 
any  policy  condition ;  that  the  payees  were  the  simple  ap¬ 
pointees  of  insured  to  receive  any  payment  that  might  be 
due  to  the  extent  of  this  interest ;  that  the  endorsement 
did  not  give  consent  to  a  chattel  mortgage  to  D.  and  S.  con¬ 
trary  to  a  provision  in  the  policy  that  it  should  be  void  in 
case  of  such  mortgage;  that  oral  testimony  was  not  admis¬ 
sible  to  show  that  the  agent  intended  the  endorsement  as  a 
consent  to  such  mortgage;  that  where  the  entire  policy,  by 
its  terms,  was  void  in  case  of  such  mortgage,  there  could  be 
no  recovery.  (Vol.  34,  Ins.  Law  Journal,  page  805.) 

It  will  be  noticed  that  the  clause  in  this  case  contained 
the  words  “subject  to  all  the  conditions  of  the  policy,”  where¬ 
as  in  the  other  cases  referred  to  they  were  omitted.  The 
prevailing  opinion  of  justice  Van  Devanter  and  the  dissenting 
opinion  of  Justice  Hook,  with  the  authorities  cited,  are  well 
worth  a  careful  study. 

One  of  the  most  interesting  questions  connected  with 
this  subject  is  whether  a  mortgagee  under  the  mortgagee 
clause  is  bound  by  the  conditions  of  the  average  or  co- 
insurance  clause.  If  he  is,  the  adverse  result  to  the  insurers 
on  account  of  their  inability  to  apply  the  contribution  clause 
to  the  mortgagee’s  interest,  would,  by  reason  of  the  general 
use  of  average  or  co-insurance  conditions,  be  in  a  large 
measure  neutralized. 

One  leading  authority  has  expressed  the  opinion  that  the 
interest  of  the  mortgagee  cannot  be  affected  by  a  co-insurance 
clause  unless  it  is  made  to  appear  in  clear  and  explicit  terms 


9 


that  the  mortgagee  agrees  to  be  bound  by  the  provisions  of 
the  clause  as  a  part  of  his  contract  with  the'  company.  While 
apparently  admitting  that  it  is  a  close  question,  this  authority 
is  led  to  the  above  conclusion  partly  on  account  of  the  attitude 
of  the  Court  of  Appeals  in  the  case  of  Farmers  Feed  Co.  vs. 
Scottish  Union  and  National  Insurance  Co.  (173  N.  Y.  241). 
It  is  not  contended  that  the  questions  are  on  all  fours  with 
each  other,  but  in  view  of  the  trend  of  the  judicial  mind  as  set 
forth  in  the  Farmers  Feed  Company  and  other  cases  it  is 
thought  that  the  court  would  treat  the  interest  of  the  mort¬ 
gagee  under  the  mortgagee  clause  as  free  from  co-insurance 
limitations. 

Another  eminent  authority  has  expressed  the  opinion  that 
the  mortgagee  would  not  be  bound  by  the  co-insurance  clause 
as  applied  to  the  value  of  the  property,  and  if  applicable  at 
all  it  would  apply  only  to  the  value  of  the  mortgagee’s  inter¬ 
est,  just  as  the  co-insurance  clause,  under  an  excess  floating 
policy  in  practice  is  made  to  apply  only  to  the  excess  value 
and  under  a  rent  policy  or  use  and  occupancy  policy  to  the 
value  of  the  inte'rest  insured ;  in  short,  that  the  words  ‘Value 
of  property”  would  be  construed  to  mean  “value  of  interest.” 

According  to  still  another  authority,  we  are  not  warranted 
in  assuming  or  admitting  that  the  mortgagee  is  exempt  from 
co-insurance  conditions  as  applied  to  the  value  of  the  prop¬ 
erty.  He  says  that  the  short  payee  clause  by  itself  has  been 
passed  upon  many  times  by  the  courts  and  for  over  fifty  years 
it  has  been  universally  held  in  New  York,  and  many  other 
states,  that  under  such  a  clause,  although  it  may  contain  the 
phrase  “as  interest  may  appear,”  the  mortgagee  can  recover 
only  what  the1  mortgagor  would  be  entitled  to  “under  the  pol¬ 
icy.”  This  payee  clause  does  not  purport  to  define  the  amount 
payable  to  a  mortgagee  other  than  by  reference  to  the  policy 
itself  and  further  to  declare  that  it  shall  not  exceed  the  amount 
of  the  mortgagee’s  interest.  The  mortgagee  clause  gives  the 
plainest  sort  of  notice  that  it  is  only  “loss  under  the  policy,” 
that  is  to  say,  loss  subject  to  the'  terms  and  provisions  of  the 
policy,  that  is  payable  to  the  mortgagee,  with  the  single  ex¬ 
ception  that  certain  classes  of  forfeiture  are  not  to  be  exacted 
as  against  the  mortgagee. 

Recent  decisions  by  the  highest  Courts  in  New  York  and 
New  Jersey  hold  that  the  mortgagee  is  not  bound  by  those 
conditions  of  the  policy  affecting  the  situation  after  a  loss 
(lines  50  to  112),  but  imply  that  he  is  bound  by  the  antecedent 
conditions  (lines  1  to  55)  except  as  modified  by  the  mortgagee 
clause.  The  average  or  co-insurance  clause,  however,  is  a  part 
of  the  contract  and  when  the  mortgagee  accepts  the  policy 
with  such  a  clause  therein,  it  is  his  own  voluntary  act.  He 
should  be  as  much  bound  by  it  as  by  the  amount  of  the  policy, 
date  of  expiration  and  description  of  the  property.  This  im¬ 
poses  no  hardship  upon  him;  his  interests  are  not  placed  at 
the  mercy  of  third  parties  and  the  arguments  which  have 


been  advanced  against  the  operation  of  the1  contribution  clause 
do  not  apply.  He  can  insist  upon  insurance  payable  to  him¬ 
self  being  taken  out  equal  to  the  stated  percentage  of  the  value 
of  the  property  and  thereby  secure  absolute  protection,  and 
it  is  the  rule  with  certain  large  loaning  institutions  to  insist 
upon  this  in  order  to  meet  the  necessities  of  each  case,  unless 
they  regard  their  security  as  ample  without  it.  One  excep¬ 
tion,  however,  should  be  noted.  If  extraordinary  improve¬ 
ments  and  repairs  are  made  to  the  building  after  a  policy  is 
issued,  without  the  knowledge  of  the  mortgagee,  thereby 
materially  increasing*  the  value  of  the  property,  this  would 
be  an  act  of  the  owner  by  which  the  mortgagee  would  not  be 
bound. 

We  have  here  three  different  views  on  this  subject  ex¬ 
pressed  by  high  legal  and  lay  authorities,  but  in  July,  1915, 
the  Appellate  Division,  Second  Department  of  the  Supreme 
Court  of  New  York  in  the  case  of  Hartwig  vs.  American  In¬ 
surance  Co.  of  Newark,  46  Ins.  Law  Journal  455  handed  down 
a  unanimous  decision  holding  that  the  average  or  co-insur¬ 
ance  limit  of  liability  is  binding  on  the  mortgagee  and  used 
many  of  the  arguments  advanced  in  the  view  last  expressed. 
The  court  held  that  the  mortgagee  clause  does  not  contain 
the  whole  contract  made  with  the  mortgagee;  that  the  amount 
of  insurance  agreed  to  be  paid  by  the  insurer  is  not  a  condi¬ 
tion,  but  an  integral  part,  of  the  policy,  limiting  its  liability, 
as  to  any  one,  to  the  proportion  of  the  loss  it  undertakes  and 
agrees  to  pay.  It  further  held  that  the1  legal  effect  of  the 
standard  average  clause  is  to  make  the  liability  of  the  insurer 
the  same  as  if  the  words  in  the  policy  “to  an  amount  not  ex¬ 
ceeding  $1500.00,”  together  with  the  80  per  cent,  average 
clause,  had  been  omitted  from  the  policy,  and  in  lieu  thereof 
had  been  written  the  words  “to  an  amount  not  exceeding  the 
sum  of  $1500.00  if  such  direct  loss  or  damage  equals  80  per 
cent,  of  the  actual  cash  value  of  the  property  insured  at  the 
time  such  loss  shall  happen,  and,  if  not,  such  proportion  of  any 
loss  or  damage  to  the  property  described  herein  as  such  sum 
of  $1500.00  bears  to  80  per  cent,  of  the  actual  cash  value  of 
said  property  at  the  time  of  such  loss.”  The  case  has  been 
appealed  and  the  decision  of  the  Court  of  Appeals  is  now 
awaited. 

In  the  City  of  New  York,  probably  on  account  of  the 
decision  in  the  Eddy  case,  (supra),  the  use  of  the  mortgagee 
clause  with  full  contribution  see'ms  to  have  fallen  into  disuse 
and  to  have  been  superseded  by  the  clause  without  contribu¬ 
tion.  The  question,  therefore,  arises  whether  in  the  state  of 
New  York,  in  view  of  the  decision  of  the  Court  of  Appeals, 
the  contribution  clause  possesses  any  virtue  whatever  and 
whether,  as  a  practical  proposition,  it  makes  any  difference 
which  of  the  two  clauses  is  used.  Seventy-five  years  ago  the 
contribution  provision  now  contained  in  the  printed  condi¬ 
tions  of  all  fire  insurance  policies,  had  not  come  into  general 


use,  and  in  event  of  partial  loss,  a  claimant  could,  if  he  desired, 
collect  the  entire  amount  of  his  loss  from  any  one  of  his  in¬ 
surers,  not  exceeding,  of  course,  the  amount  of  its  policy,  and 
that  company  would  look  to  the  other  companies  for  their 
pro  rata  proportion  of  the  claim.  We  have  seen  that  in  the 
Hastings  case  the  mortgagee  is  not  bound  by  the*  contribution 
clause  in  the  policy  and  in  the  Eddy  case  that  the  contribution 
clause  in  mortgagee  agreement  applies  only  to  policies  payable 
to  the  mortgagee  or  consented  to  by  him.  In  the  Heilbrunn 
case,  we  find  that  the  contract,  so  far  as  the  mortgagee  is 
concerned,  stops  at  line  59  and  that  the  succeeding  conditions, 
among  which  the  contribution  clause  appears,  is  not  binding 
upon  him.  If,  therefore,  there  is  no  contribution  provision 
in  the  mortgagee  clause  and  the  mortgagee  should  desire  to 
collect  the  entire  amount  of  his  loss  from  any  one  of  his 
insurers,  there  would  seem  to  be  nothing  to  prevent  his  doing 
so,  although  he  would  hardly  care  to  exercise  this  right  unless 
some  of  his  insurers  should,  by  reason  of  a  severe  conflagra¬ 
tion  or  otherwise,  become  insolvent.  This  is  a  somewhat 
remote  contingency,  although  large  conflagrations  are  occur¬ 
ring  with  too  great  frequency  and  it  is  simply  mentioned  as 
one  of  the  possibilities  under  the  mortgagee  clause  which 
does  not  contain  the  contribution  provision. 

That  the  interest  of  the  mortgagee  is  quite  a  live  question 
is  evidenced  by  the  fact  that  the'  September,  1911,  issue  of  the 
“Insurance  Law  Journal”  reported  three  cases  and  the  Octo¬ 
ber  issue  one  case,  touching  various  phases  of  the  subject, 
but  by  far  the  most  interesting,  most  important  and  most  dis¬ 
appointing  was  that  of  Heilbrunn  vs.  German  Alliance  In¬ 
surance  Co.,  decided  by  the  New  York  Court  of  Appeals,  to 
which  reference  has  been  made,  affirming  the  majority  opinion 
of  the  Appellate  Division,  202  N.  Y.  610,  95,  N.  E.  823.  The 
court  decided  that  the  mortgagee’s  interest  is  not  affected  by 
any  of  the  policy  conditions  following  line  59,  which  relate 
to  conditions  after  a  fire,  and  as  most  of  the  conditions  pre¬ 
ceding  line  59  are  either  modified  or  nullified  by  the  mortgagee 
clause,  he  comes  pretty  close  to  having  a  conditionless  con¬ 
tract.  It  follows  from  this  that  in  the  state  of  New  York  a 
mortgagee  is  under  no  obligation  to  give  the  company  any 
notice  of  loss,  nor  furnish  proof  of  loss,  nor  submit  to  appraisal 
or  examination  of  any  kind.  He  is  not  bound  by  the  condi¬ 
tions  of  the  contribution  clause  and  can  bring  suit  at  any 
time  within  the  statutory  limit  of  six  years.  The'  Court  ad¬ 
mitted  that  insurance  companies  ,  ought  to  have  more  protec¬ 
tion  in  the  matter  of  time  within  which  actions  upon  their 
policies  must  be  brought  and  possibly  in  other  respects,  but 
that  relief  must  come,  if  at  all,  from  the  legislature  through 
modification  of  the  standard  policy.  The  dissenting  opinion 
of  Justice  McLaughlin  in  the  Appellate  Division  is  a  masterly 


12 


effort  and  presents  the  most  rational  construction  of  the 
standard  policy  that  has  yet  appeared.  The  Supreme  Court 
of  Ohio,  in  the  case  of  Erie  Brewing  Co.  vs.  Ohio  Farmers 
Insurance  Co.  (Ohio,  1909),  89  N.  E.  1065,  Vol.  39  Ins.  Law 
Journal  200,  rendered  an  opinion  similar  to  that  of  Justice 
McLaughlin,  and  swung  the  pendulum  so  far  in  the  other 
direction  as  to  hold  that  the  mortgagee  under  the  mortgagee 
clause  was  bound  by  an  award  of  appraisers  to  which  he  was 
not  a  party  and  of  which  he  had  no  notice. 

The  Court  of  Appeals  in  its  decision  in  the  Heilbrunn 
case  (supra)  said: 

“But  the  difficulty  is  that  the  language  of  those  stipulations  or 
conditions  of  the  policy  which  relate  to  the  proceedings  after  the 
liability  of  the  company  has  accrued  through  the  fire,  does  not  enable 
us  to  apply  them  to  the  mortgagee  in  such  part  only  as  may  be  prac¬ 
tical  or  expedient.  We  must  hold  (unless  our  decision  be  wholly 
arbitrary)  that  all  those  stipulations  which  in  terms  relate  to  the  mort¬ 
gagor  only,  apply  equally  to  the  mortgagor  and  mortgagee,  or  we 
must  hold  that  none  of  them  do.  The  former  dictates  that  which  is 
impossible  and  the  order  of  the  Appellate  Division  in  this  case  should 
therefore  be  affirmed.” 

After  reading  this  decision  in  connection  with  that  of  the 
Appellate  Division  which  it  affirms,  and  the  strong  dissenting 
opinion  of  Justice  McLaughlin,  one  cannot  help  wondering 
whether,  if  the  interests  of  the  mortgagee  rather  than  those 
of  the  insurance  company  had  been  adversely  affected,  the 
situation  might  not  in  some  manner  have  been  saved  from  the 
realm  of  the  impossible.  The  Court  in  the  Eddy  case  experi¬ 
enced  no  difficulty  whatever  in  actually  striking  out  of  the 
contribution  clause  a  certain  inconvenient  phrase  which  was 
as  plain  as  language  could  make  it  on  the  ground  that  the 
only  meaning  which  could  reasonably  be  given  it  could  not 
possibly  have  been  intended.  That  the  legislature  intended, 
for  obvious  reasons  to  grant  to  the  mortgagee'  a  somewhat 
more  liberal  contract  than  to  the  property  owner,  cannot  be 
doubted,  but  that  it  for  one  moment  intended  when  it  adopted 
a  standard  statutory  form  of  policy  which  the  title  to  the  act 
shows  was  established  as  a  “uniform  policy”  for  all  parties, 
to  single  out  this  one  class,  to  wit :  mortgagees,  and  exempt 
them  from  all  the  usual  obligations  which  all  other  insured 
citizens  must  observe,  is  inconceivable. 

Line  58  indicates  very  clearly  that  it  is  only  “the  condi¬ 
tions  hereinbefore  contained,”  that  can  be  modified  by  the 
mortgagee  clause  or  rider,  and  the  Supreme  Court  of  Ohio  in 
its  well  considered  opinion  (supra)  says : 

“It  would  appear  reasonable  that  in  respects  not  modified  or  lim¬ 
ited  by  the  express  language  of  the  mortgagee  clause,  the  plain  pro¬ 
visions  of  the  policy  must  prevail  and  be  observed.” 

This  is  a  reasonable  interpretation  of  the  contract  even 
if  no  consideration  be  given  to  the  intention  of  the  legislature, 
but  in  New  York  the  court  of  last  resort  has  spoken  and  the 
law  in  that  state  has  therefore  been  determined.  In  the  Eddy 


13 


case  the  Court  found  it  possible  to  arbitrarily  decide  contrary 
to  the  manifest  intention ;  in  the  Heilbrunn  case  it  found  it 
impossible  to  arbitrarily  decide  according  to  the  undoubted 
intention. 

After  rendering  the  sound  decision  to  which  reference 
has  been  made,  the  personnel  of  the  Supreme  Court  of  Ohio 
underwent  a  change  and  in  a  very  crude  and  ill-advised  opin¬ 
ion,  held  that  the  mortgagee,  could  recover,  even  though  the 
policy  might  be  void  as  to  the  mortgagor,  and  this  too  under 
the  ordinary  “loss  payable”  clause.  Farmers  National  Bank 
vs.  Delaware  Insurance  Co.  (83  O.  S.  309),  40  Ins.  Law  Jour¬ 
nal  1248.  This  is  the  seventh  state  which  has  placed  this 
interpretation  upon  lines  56  to  59. 

It  has  been  seen  that  under  the  forms  of  policy  in  use 
prior  to  the  adoption  of  the  New  York  Standard,  the  plain 
“loss  payable”  provision,  in  the  absence  of  the  mortgagee 
clause,  did  not  import  an  agreement  to  pay  the  mortgagee 
independent  of  that  to  pay  the  “insured”  or  the  mortgagor ; 
that  is,  if  the  policy  had  been  rendered  void  as  to  the  mort¬ 
gagor  or  owner,  it  became  void  as  to  the  mortgagee  also.  The 
rule  is  the  same  in  the  case  of  the  standard  form,  Moore  vs. 
Hanover  Fire  Ins.  Co.,  141  N.  Y.  219,  36  N.  E.  191,  but,  the 
words  “first  payable”  and  “as  his  interest  may  appear”  import 
that  the  interest  of  the  mortgagee  is  greater  than  the  interest 
of  a  mere  naked  appointee,  Pitney  vs.  Glens  Falls  Ins.  Co., 
65  N.  Y.  6.  He  would  be  a  necessary  party  to  an  action  on 
the  policy  brought  by  the  mortgagor.  Lewis  vs.  Guardian 
Fire  &  Life  Assurance  Co.,  181  N.  Y.  392,  74.  N.  E.  224,  106 
Am.  St.  Rep.  557.  He  is  not  bound  by  a  settlement  of  a  claim 
to  which  he  has  not  assented.  Hathaway  vs.  Orient  Ins.  Co., 
134  N.  Y.  409,  32  N.  E.  40,  17  L.  R.  A.'  514. 

The  rights  of  the  mortgagee  under  the  plain  “loss  payable” 
clause  are  clearly  set  forth  in  the  unanimous  opinion  of  the 
Court  of  Appeals  of  New  York  in  the  case  of  McDowell  vs. 
St.  Paul  F.  &  M.  Ins.  Co.,  207  N.  Y.  482,  Vol.  42  Ins.  Law 
Journal  796,  where  the  court  decided  that  the  mortgagee  is 
not  precluded  from  recovery  of  loss  incurred  because  the 
mortgagor  refused  to  make  proof  of  loss  as  required.  The 
court  said  that  it  was  reasonable  that  those  conditions  which 
affect  the  risk,  while  it  is  subsisting,  should  apply  alike  to 
mortgagor  and  mortgagee,  unless  the  parties  have  stipulated 
otherwise  by  attaching  a  mortgagee  clause,  but  that  it  was 
unreasonable  after  a  loss  had  occurred,  that  the  interest  of  the 
mortgagee  should  be  subject  to  the  caprice  of  the  owner,  and 
that  was  equally  true  whether  there  was  a  mortgagee  clause 
or  merely  a  “loss  payable”  endorsement.  The  natural  infer¬ 
ence  to  be  drawn  from  this  decision  and  that  of  Hathaway  vs. 
Orient  Ins.  Co.  (supra)  is  that  under  the  “loss  payable”  clause, 
as  well  as  under  the  mortgagee  clause,  the  mortgagee  is  not 
bound  by  any  of  the  policy  conditions  after  line  60. 


14 


In  Massachusetts  the  courts,  prior  to  the  adoption  of  the 
present  standard  policy,  held  that  in  the  absence  of  a  subroga¬ 
tion  provision  in  the  policy,  the  mortgagee  could  collect  the 
amount  of  loss  and  also  retain  the  mortgage  notes ;  Kings  vs. 
Ins.  Co.,  Mass.,  7  Cushing  1.  This  is  the  only  state  which 
has  so  held ;  the  opinion  has  been  severely  criticised  and  other 
jurisdictions  have'  ruled  that  even  in  the  absence  of  an  agree¬ 
ment  for  subrogation  the  insurer  is  entitled  to  an  equitable 
assignment  of  the  debt  from  the  mortgagee. 

The  Supreme  Judicial  Court  of  Massachusetts  has  decided 
that  under  the'  standard  policy  of  that  state,  if  the  title  be¬ 
comes  vested  in  the  mortgagee  by  foreclosure,  the  policy  is 
void  unless  the  sale  is  consented  to  by  the  insurer.  Boston 
Co-operative  Bank  vs.  American  Central  Ins.  Co.,  87  N.  E. 
594,  38  Ins.  Law  Journal,  599.  It  has  also  held  that  the  mort¬ 
gagee  must  file  notice  and  proofs  of  loss  if  the  owner  does 
not,  but  he  is  granted  a  reasonable  time  and  is  not  held  to 
such  a  strict  accountability  as  the  insured  in  the  matter  of 
time.  LTnion  Institution  for  Savings  vs.  Phoenix  Ins.  Co.,  37 
Ins.  Law  Journal,  43. 

In  Connecticut  it  has  been  held  that  under  the  short  form 
“loss  payable”  clause  the  mortgagee  has  no  right  to  a  voice 
in  the  appraisal,  while  under  the  mortgagee  cause  he  has. 
Collinsville  Savings  Society  vs.  Boston  Insurance  Co.,  31  Ins. 
Law  Journal,  1031. 

The  words  “act  or  neglect”  used  in  the  mortgagee  clause 
have  been  held  to  refer  to  any  act  or  omission  on  the  part  of 
the  mortgagor,  whether  before  or  after  the  issue  of  the  rider 
or  policy,  but  the  decisions  on  this  point  are  conflicting.  On 
the  other  hand,  it  has  been  held  that  the  clause  is  effective 
only  as  to  subsequent  acts  or  neglect  of  the  mortgagor ;  also 
that  if  a  condition  of  the  policy  has  already  been  violated  so 
as  to  afford  a  ground  for  forfeiture,  it  cannot  be  revived  by 
attaching  thereto  the  mortgagee  clause  unless  a  new  considera¬ 
tion  is  paid  therefor.  Misrepresentations  of  which  the  mort¬ 
gagee  has  knowledge  will  be  attributable  to  him  and  he  will 
also  be  bound  by  his  own  misstatements.  Generally  speak¬ 
ing,  the  better  opinion  seems  to  be  that  no  act  or  neglect  of 
the  mortgagor  unknown  to  the  mortgagee,  whether  prior  or 
subsequent  to  the'  date  of  the  contract,  will  avoid  it  as  to  his 
interest.  The  latest  decision  on  this  point  is  that  of  Reed, 
et  al,  vs.  Firemen’s  Insurance  Co.,  of  New  Jersey  (Vol.  40 
Ins.  Law  Journal,  1711). 

The  mortgagee  clause  give's  the  mortgagee  the  right  to 
commence  foreclosure  proceedings,  but  makes  it  incumbent 
upon  him  to  notify  the  company  of  any  change  in  the  title  or 
ownership  of  the  property  which  shall  come  to  his  knowl¬ 
edge.  It  has  been  held  in  at  least  four  states  (Kansas,  Min¬ 
nesota,  Iowa  and  Rhode  Island)  that  this  has  reference  to  a 
change  or  transfer  of  title  to  a  third  person  and  not  to  one 
from  the  mortgagor  to  the  mortgagee  by  foreclosure.  The 


15 


argument  is  that  the  insurer  must  have  known  when  attaching 
the  clause  that  it  might  be  necessary  for  the  mortgagee,  in 
order  to  protect  his  interest  under  the  mortgage,  to  commence 
foreclosure  proceedings;  that  this  would  not  have  a  tendency 
to  diminish  the  interest  of  the  mortgagee  in  the  property,  but 
rather  to  increase  it,  and  it  has  been  held  that  an  increase  in 
the  interest  of  the  insured  is  no  ground  for  forfeiture  of  the 
policy.  Pioneer  Savings  &  Loan  Co.  vs.  St.  Paul  F.  &  M. 
Ins.  Co.,  Minn.,  S.  C.  26  Ins.  Law  Journal  826;  Lancashire 
Ins.  Co.  vs.  Boardman,  Kan.,  S.  C.  27  Ins.  Law  Journal  1898; 
Bailey  vs.  American  Central  Ins.  Co.  (Iowa),  C.  C.  13  Fed. 
Rep.  250;  Continental  Ins.  Co.  vs.  Wood,  50  Kan.  346,  31  Pac. 
1079;  Heaton  vs.  Manhattan  Fire  Ins.  Co.,  7  R.  I.  502;  Esch 
vs.  Home  Ins.  Co.,  78  Iowa  334,  43  N.  W.  229,  16  Am.  St. 
Rep.  443;  Dodge  vs.  Hamburg  Bremen  F.  Ins.  Co.,  4  Kan. 
App.  415,  46  Pac.  25;  Washburn  Mill  Co.  vs.  Fire  Ass’n,  60 
Minn.  170,  61  N.  W.  828,  51  Am.  St.  Rep.  500. 

In  the  case  last  cited  it  was  held  that  the  subsequent  ac¬ 
quisition  of  the  title  to  the  mortgaged  property  by  the  mort¬ 
gagee  will  not  affect  the  right  of  the  insurance  company  to 
the  subrogation  as  stipulated. 

On  the  other  hand,  if,  at  the  time  of  the  issue  of  the 
policy  or  the  attaching  of  the  mortgagee  clause,  the  mort¬ 
gagee  has  knowledge  of  facts  which  render  the  policy  void 
as  to  the  insured,  it  is  void  also  as  to  the  mortgagee,  as  he  is 
bound  by  every  consideration  of  good  faith  to  disclose  to  the 
insurer  the  information  he  possesses.  Genessee  Savings  & 
Loan  Ass’n  vs.  U.  S.  Fire  Ins.  Co.,  16  App.  Div.  587  N.  Y. 

If  a  mortgagee,  after  a  fire,  assigns  the  mortgage,  with¬ 
out  transferring  any  interest  in  the  policy  or  right  of  action 
for  the  loss  caused  by  fire,  there  can  be  no  recovery  by  the 
assignee  of  the  mortgage.  Kupfersmith  vs.  Delaware  Ins.  Co. 
(N.J.). 

If  foreclosure  proceedings  are  commenced  and  before 
they  proceed,  so  far  as  a  judgment,  a  fire  occurs,  the  mort¬ 
gagee  has  a  right  to  proceed  with  the  foreclosure  and  to  a 
sale  of  the  premises,  and  the  value  of  the  subrogation  rights 
of  the  insurance  company  will  depend  upon  whether  or  not 
anything  beyond  the  mortgage  debt  is  realized  through  the 
proceedings.  Eddy  vs.  London  Assurance  Co.  (supra). 

An  assignment  of  the  mortgage  accompanied  by  an  as¬ 
signment  of  interest  in  the  policy  by  the  mortgagee  would 
render  the  mortgagee  agreement  void  and  would  be  without 
legal  support  against  the  insurer  unless  consented  to.  Kase 
vs.  Hartford  Ins.  Co.,  58  N.  J.  34. 

A  mortgagee  who  has  sold  his  mortgage  and  has  either 
guaranteed  payment  of  the  mortgage  debt  or  endorsed  the 
mortgage  notes  without  taking  the  precaution  to  add  the 
words  “without  recourse”  has  an  insurable  interest  in  the 
property  which  he  should  not  lose  sight  of,  for  if  an  insur¬ 
ance  company  pays  a  loss  to  the  assignee  of  the  mortgage,  for 


16 


which  it  is  not  liable  to  the  mortgagor  or  owner,  the  com¬ 
pany  in  the  exercise  of  its  subrogation  rights  can  call  upon 
the  original  mortgagee  as  guarantor  or  endorser  for  reim¬ 
bursement. 

It  is  the  prevailing  custom  in  New  York  City  to  make 
the  following  endorsement  on  policies  no  matter  by  whom 
presented : 

“The  interest  of  .  mortgagee  herein  having  ceased, 

loss,  if  any,  is  now  payable  to  .  mortgagee.” 

without  securing  anything  whatever  in  the  shape  of  a  release 
from  the  original  payee'.  Considering  the  number  of  such 
endorsements  which  are  made  each  year,  it  is  really  remark¬ 
able  that  so  little  trouble  has  arisen.  There  was  a  decision 
bearing  on  this  point  many  years  ago,  in  case  of  Reid  vs. 
McCrum,  91  N.  Y.,  412.  Policies  on  the  buildings  were  en¬ 
dorsed  “Loss,  if  any,  payable  to  John  Reid,  mortgagee.”  Sub- 
secpiently  McCrum  induced  the  insurers  to  cancel  the  endorse¬ 
ment  and  write  on  the  policies  as  follows :  “The  mortgagee’s 
interest  having  ceased,  the  loss,  if  any,  is  now  payable  to 
Hugh  McCrum  as  owner.”  ,The  mortgagee’s  interest  had  not 
ceased  and  after  the  buildings  were  destroyed  by  fire,  the 
mortgagee  brought  an  action  to  foreclose  his  security,  making 
McCrum  and  the  insurers  parties  defendant.  It  was  quite 
properly  held  that  the  policies  could  not  be  legally  changed 
without  the  assent  of  the  mortgagee  and  that  he  was  entitled 
to  recover  the  loss  from  thejnsurers. 

The  question  is  frequently  asked  whether  any  liability 
accrues  to  a  second  mortgagee  unless  his  security  has  been 
impaired  by  the  fire,  or  whether  under  the  mortgagee  clause 
he  can  collect  by  reason  of  the  mere  fact  that  a  loss  or  damage 
by  fire  has  occurred  to  the  property  described  in  the  policy ; 
in  short,  whether  it  is  loss  to  the  second  mortgagee’s  interest 
or  loss  to  the  property  itself  that  determines  the  liability  of 
the  insurer. 

It  has  been  uniformly  held  that  a  first  mortgagee  under 
the  mortgagee  clause  can  collect  the  amount  of  loss  to  the 
property  not  exceeding  his  interest,  notwithstanding  the  fact 
that  the  value  remaining  may  be  many  times  the  amount  of 
the  mortgage  debt,  and  even  though  it  is  self-evident  that  the 
first  mortgagee  has  not  and  will  not  sustain  any  loss  by  reason 
of  the  fire.  But  the  fact  remains  that  his  security  is  actually 
reduced  and  consequently  impaired  to  the  extent  of  the  amount 
of  loss  by  fire.  He  can  therefore  demand  payment  from  his 
insurer,  who  will  in  turn  be  subrogated  to  the  extent  of  the 
amount  paid. 

The  foregoing  reasoning  appears  to  be  perfectly  logical 
as  respects  the  interest  of  a  first  mortgagee,  but  a  somewhat 
different  situation  is  presented  in  connection  with  the  interest 
of  a  second  mortgagee,  for  under  certain  conditions  the  secur¬ 
ity  of  the  latter  may  not  be  at  all  impaired  by  the  fire.  Can 


17 


*1  rirwlf  i 


■Mi 


he  in  such  circumstances  collect  from  his  insurer?  In  answer 
to  this  question  two  diametrically  opposite  opinions  have  been 
expressed.  One  authority  theorizes  as  follows,  to  wit : 

“If  a  second  mortg*agee  has  a  separate  policy  protecting 
his  interest,  he  has  a  right  to  look  to  it  for  indemnity. 
Whether  or  not  he  sustains  a  loss  depends  upon  conditions. 
There  are  circumstances  under  which  a  second  mortgagee’s 
interest  may  not  be  affected  by  a  fire  and,  if  not,  he  cannot 
collect  anything  under  a  policy  made  payable  to  him.  For 
instance,  if  property  should  be  sold  and  the  new  owner  should 
take  out  a  new  policy  with  loss,  if  any,  payable  to  the  first 
mortgagee  under  a  mortgagee  clause,  and  the  second  mort¬ 
gagee  should  hold  a  policy  in  the  name'  of  the  former  owner, 
with  loss,  if  any,  payable  to  the  second  mortgagee,  the  old 
policy  would  be  void  as  respects  the  new  owner.  Then  if  the 
company  which  insured  the  new  owner  should  pay  the  full 
amount  of  the  loss  to  the  first  mortgagee,  the  interest  of  the 
second  mortgagee  would  not  be  affected,  because  the  amount 
of  the  first  mortgage  would  have  been  reduced  to  the  same 
extent  that  the  property  had  been  damaged,  leaving  the  second 
mortgagee’s  interest  relatively  the  same  as  it  was  and  there¬ 
fore  sustaining  no  loss  by  the1  fire. 

If  two  policies  should  be  issued  to  the  same  owner,  one 
payable  to  the  first  and  the  other  payable  to  the  second  mort¬ 
gagee,  and  a  valid  claim  should  arise  under  both,  the  first 
mortgagee'  could  demand  the  full  amount  of  the  loss  from  his 
own  insurer,  in  which  event  said  insurer  would  be  subrogated 
to  the  extent  of  the  amount  paid  in  excess  of  its  pro  rata 
liability  to  the  owner.  The  first  mortgage  under  these  circum¬ 
stances  would  be'  reduced  only  to  the  extent  of  said  pro  rata 
liability,  and  the  second  mortgagee  could  collect  from  the 
insurer  its  pro  rata  proportion  of  the  loss,  but  no  more. 

By  such  a  construction  the  second  mortgagee  gets  all  the 
benefit  from  his  insurance  that  he  is  entitled  to,  namely,  that 
his  interest  shall  not  suffer  by  any  loss  or  damage  by  fire  to 
the  property.” 

Another  authority  advances  the  following  argument,  to 
wit :  “While  it  is  true  that  policies  taken  out  in  favor  of  mort¬ 
gagees  are  in  most  of  the  States  to  be  regarded  as  contracts 
of  indemnity,  they  provide  very  explicitly  how  that  indemnity 
shall  be  paid.  It  must  be  paid  either  in  cash  or  by  a  reinstate¬ 
ment  of  the  property  itself ;  that  is,  in  the  case  of  a  burned 
building,  by  a  rebuilding.  The  insurance  company  in  such 
cases  cannot  escape  payment  by  showing  that  in  reality  the 
insured  has  suffered  no  actual  loss.  The  insurance  contract 
with  the  mortgagee  is  not  in  substance  a  guarantee  of  his 
debt  or  a  guarantee  that  his  collateral  security  shall  continue 
of  a  certain  value,  but  on  the  other  hand,  is  to  be  construed 
as  an  insurance  on  property  against  fire  loss  to  that  property; 
and  if  a  fire  loss  to  that  property  occurs,  then  the  insurer 
must  either  rebuild  the  property  itself  or  pay  the  full  amount 


18 


of  the  fire  loss  to  the  second  mortgagee  or  to  any  other  mort¬ 
gagee,  but  not  exceeding,  of  course,  the  amount  of  his  inter¬ 
est,  that  is,  the  amount  of  his  debt.  In  principle  it  matters 
not  at  all  whether  the  mortgage  is  a  first  or  a  second  mort¬ 
gage. 

“An  insurance  company  has  no  authority  to  guarantee 
the  payment  of  a  debt.  Its  power  is  limited  to  insuring 
against  such  loss  or  damage  as  happens  by  fire  to  property. 
In  insuring  a  mortgage  interest  it  does  not  insure  the  debt, 
but  the  interest  of  the  mortgagee  in  the  property,  upon  the 
safety  of  which  depends  his  security.” 

There  does  not  appear  to  be  any  American  decisions  bear¬ 
ing  directly  on  the  interest  of  a  second  mortgagee,  but  there 
is  an  English  decision  which  apparently  supports  the  latter 
view.  (Westminster  Fire  Offices  vs.  Glasgow  Provident  In¬ 
vestment  Society  [1888],  13  App.  Cas,,  699).  That  case  had 
to  do  with  two  series  of  mortgage  bondholders,  the  suit  being 
brought  by  the  second  mortgage  bondholders.  The  insurance 
companies  defended  on  the  ground  that  the  entire  amount  of 
loss  had  been  paid  by  the  insurers  of  the  first  mortgage  bond¬ 
holders.  But  the  English  Court  of  Appeals  decided  that  this 
was  no  ground  of  defense  in  whole  or  in  part.  But  there  is 
a  dictum  from  one  of  the  judge's  to  the  effect  that  if  the  money 
so  paid  had  been  actually  employed  to  reinstate  the  premises 
then  the  decision  might  have  been  different  on  the  theory  that 
in  that  event  the  second  mortgage  bondholders  would  have 
sustained  no  loss.  This  dictum  seems  to  lean  to  some  extent 
at  least  toward  the  first  of  the  foregoing  opinions. 

If  the  latter  view  is  the  correct  one',  and  if  a  second  mort¬ 
gagee  can  collect  the  amount  of  his  mortgage  from  the  com¬ 
panies  insuring  his  interest  irrespective  of  whether  or  not  his 
security  has  been  impaired  by  the  fire,  it  follows  that  in  many 
instances,  especially  in  times  of  real  estate  depression,  a  fire 
would  be  a  veritable  godsend,  for  his  hitherto  absolutely  dead 
interest  would  instantaneously  assume  unexpectedly  valuable 
proportions  and  the  insurers  would  be  compelled  to  pay  a  loss 
which  had  already  accrued  from  causes  other  than  fire. 

This  possibility  directs  attention  very  forcibly  to  the  fact 
that  separate  policies  containing  the  mortgagee  clause  should 
not  be  issued  in  favor  of  a  second  mortgagee,  but  when  it  is 
desired  to  protect  said  interest  under  a  mortgagee  clause,  the 
form  should  read  substantially  as  follows,  viz : 

“Loss,  if  any,  under  this  policy  shall  be  first  payable  to 

. first  mortgagee  as  his  interest  may  appear  ; 

after  the  debt  and  interest  secured  by  first  mortgage  shall  be 
fully  satisfied,  the  remaining  loss,  if  any,  shall  be  payable'  to 
.  second  mortgagee  as  his  interest  may  ap¬ 
pear.  subject  to  mortgagee  clause  hereto  attached:” 

In  connection  with  the  “loss  payable”  or  mortgagee' 
clause,  an  interesting  question  arises  which  has  received  but 
little  attention  at  the  hands  either  of  text  writers  or  the  courts. 


19 


and  that  is  whether  the  words  “as  interest  may  appear”  or 
“as  interest  shall  appear”  are  descriptive  of  the  interest  exist¬ 
ing  at  the  time  of  the  issuance  of  the  policy  or  at  the  time  of 
the  fire.  The  Supreme  Judicial  Court  of  Massachusetts  when 
called  upon  to  decide  the  question,  held  that  the  words  re¬ 
ferred  to  the  interest  of  the  mortgagee  as  it  existed  at  the 
time  of  the  issuance  of  the  policy,  thus  giving  to  the  words 
a  restricted  rather  than  a  comprehensive  interpretation.  This 
view  has  the  effect  of  preserving  to  the  insurance  company 
the  subrogation  rights  which  were  within  its  contemplation 
at  the  inception  of  the  contract. 

In  the  case  of  Attleborough  Savings  Bank  vs.  Security 
Ins.  Co.,  168  Mass.  147,  the  plaintiff,  subsequent  to  the  issu¬ 
ance  of  the  policy,  had  taken  a  second  and  third  mortgage  on 
the  property  in  addition  to  the  one  it  already  had,  and  contended 
that  it  was  entitled  to  collect  the  amount  due  on  all  three 
mortgages  by  reason  of  the  unrestricted  nature  of  the  phra¬ 
seology  descriptive  of  its  interest,  but  the  court  held  that  the 
words  used  contemplated  a  possible  decrease  rather  than  an 
increase  of  the  extent  of  the  mortgagee’s  interest.  It  is  doubt¬ 
less  on  account  of  this  decision  that  in  Massachusetts  the 
mortgagee  clause  is  so  phrased  as  to  include  the  mortgagee’s 
interest  under  present  and  all  future  mortgages  covering  the 
premises. 

It  would  certainly  seem  that  in  the  absence  of  an  express 
agreement,  the  mortgagee  should  not  be  permitted  to  increase 
his  interest  at  will  and  as  a  result  possibly  render  valueless 
the  insurer’s  subrogation  right,  but  notwithstanding  the  high 
authority  above  referred  to  which  has  passed  on  the  question, 
it  is  by  no  means  certain  that  its  decision  will  be  followed  in 
other  jurisdictions,  and  it  is  not  at  all  improbable  that  other 
tribunals  equally  distinguished  may  rule  that  in  the  absence 
of  restrictive  words  in  the  mortgagee  clause,  it  is  the  interest 
of  the  mortgagee  at  the  time  of  the  fire  that  is  intended  to  be 
covered.  If  so,  this  would  furnish  an  additional  reason  for 
the  desire  on  the  part  of  a  junior  encumbrancer  to  safeguard 
his  interest  by  insurance  entirely  independent  of  that  existing 
in  favor  of  the  senior  mortgagee. 

The  belief  is  quite  general  among  insurance  companies 
that  in  event  of  neglect  on  the  part  of  the  mortgagor  or  owner 
to  pay  any  premium  due  under  the  policy  the  mortgagee  is 
legally  liable  therefor,  but  even  as  to  this  the  courts  are 
divided  in  their  opinions.  The  Appellate1  Division  of  the  Su¬ 
preme  Court  of  New  York,  Third  Department,  at  the  March. 
1914,  term  in  the  case  of  Coykendall  vs.  Blackmer,  held  that 
the  words  “provided  that  in  case  the  mortgagor  or  owner 
shall  neglect  to  pay  any  premium  due  under  this  policy,  the 
mortgagee  (or  trustee)  shall  on  demand  pay  the  same”  is  not 
a  covenant,  but  only  a  condition,  and  that  the  only  effect  of 
failure  on  the  part  of  the  mortgagee  to  pay  the  premium  is 
to  deprive  him  of  the  special  privileges  accorded  him  in  the 


20 


mortgagee'  agreement,  and  that  he  is  not  liable  for  the  pre¬ 
mium.  One  justice  dissented  from  the  principle  enunciated, 
but  decided  against  the  plaintiff  because  he  had  not  made  the 
demand  on  the  mortgagee  within  a  reasonable  time.  This 
case  did  not  come  before  the  Court  of  Appeals.  On  the  con¬ 
trary  the  highest  courts  in  North  Dakota  and  Kansas  have 
decided  that  the  mortgagee  is  liable  for  the  premium  in  case 
of  default  on  the  part  of  the  mortgagor.  The  North  Dakota 
Court  said,  “The1  clause  provides  that  no  neglect  or  act  of  the 
mortgagor,  nor  shall  the  vacancy  of  the  premises  invalidate 
the  policy.  If  defendant’s  contention  is  sound,  this  provision 
would  be  nugatory  if  the  mortgagor  should  pay  the  premium 
on  time ;  for  it  is  only  in  case  of  the  mortgagor’s  default  that 
the  mortgagee  can  perform  this  condition  of  payment,  and 
defendant  insists  that  it  is  only  on  performance  of  such  con¬ 
dition  by  him  that  he  can  have  any  rights  under  the  mort¬ 
gagee  clause.  This  construction  would  destroy  its  effect  in 
many  cases.  It  would  often  deprive'  the  mortgagee  of  any 
benefit  from  the  provisions  that  he  should  not  be  prejudiced 
by  any  act  or  neglect  of  the  mortgagor  by  reason  of  vacancy, 
etc.  of  the  premises.  The  mortgagee  clause  gave  the  mort¬ 
gagee  immunity  from  certain  forfeitures  resulting  under  the 
policy  from  the  mortgagor’s  acts  or  omissions,  and  the  mort¬ 
gagee  in  turn  agreed  to  pay  for  this  immunity  the  premium 
in  case  of  the  mortgagor’s  default.  This  is  the  clear  import 
of  the  agreement.”  The  Kansas  Court  said,  “While  the  word 
‘provided’  ordinarily,  indicates  that  a  condition  follows,  there 
is  no  magic  in  the’  term,  but  the  clause  is  to  be  construed  from 
the  words  employed  and  from  the  purpose  of  the  parties 
gathered  from  the  whole  instrument.”  St.  Paul  F.  &  M.  Ins. 
Co.  vs.  Upton,  2  N.  D.  229,  53  Pac.  472 :  Boston  Safe  Deposit 
&  Trust  Co.  vs.  Thomas,  59  Kan.  470,  53  Pac.  472. 

The  company  reserves  the  right  to  cancel  the'  policy  at 
any  time  as  provided  by  its  terms,  but. in  such  case  the  policy 
shall  continue  in  force  for  the  benefit  onfy  of  the  mortgagee 
for  ten  days  after  notice'  to  the  mortgagee  of  such  cancella¬ 
tion  and  shall  then  cease,  and  the  company  shall  have  the 
right  on  like  notice  to  cancel  the  mortgagee  agreement.  It 
will  be  noticed  that  there  are'  two  ways  of  getting  rid  of  liabil¬ 
ity  to  the  mortgagee,  one  by  cancelling  the  policv  and  the 
other  by  cancelling  the  mortgagee  agreement.  The  policy 
cannot  be  legally  cancelled  in  less  than  five  days,  unless  by 
waiver  on  part  of  the  insured :  hence  “ten  days  after  notice 
to  the  mortgagee  of  such  cancellation”  may  mean  fifteen  days 
and  perhaps  more  from  date  of  original  notice  to  the  insured. 
But  the  mortgagee  agreement,  the  vital  principle  as  regards 
the  mortgagee’s  interest,  can  be  cancelled  by  ten  days’  notice, 
and  too  much  care  cannot  be  taken  to  see  that  notices  are 
properly  worded.  The  following  is  suggested  as  a  legal  form 
of  notice  to  the  mortgagee : 


21 


“We  elect  to  cancel  the  mortgagee  agreement  attached  to  and 

made  a  part  of  our  Policy  No .  issued  to  . 

through  our  agency  at  .  on  .  19  ,  cov¬ 
ering  on  .  at  .  and  made  payable  to  you  as 

mortgagee  (or  trustee),  in  event  of  loss,  and  hereby  give  you  ten  days’ 
notice  thereof,  as  provided  by  the  terms  of  said  mortgagee  clause. 

“Take  notice  that  on  the  .  day  of  . , 

19  ,  at  twelve  o’clock  noon  or,  if  that  date  is  not  ten  days  from  the 

receipt  hereof,  then  at  the  expiration  of  ten  days  from  its  receipt,  the 
said  agreement  will  terminate  and  cease  to  be  in  force.” 

Although,  except  in  the  seven  States  previously  referred 
to,  a  mortgagee  under  the  plain  ‘Toss  payable”  clause  cannot 
collect  if  the  policy  is  void  as  to  the  mortgagor  or  owner,  he 
being  bound  presumably,  by  all  the  policy  conditions  preced¬ 
ing  line  59,  all  the  courts  which  have  passed  directly  upon  the 
question  have  held  that  a  policy  cannot  be  cancelled  as  to  the 
mortgagee,  without  notice.  But  the  cancellation  provision  is 
in  line  51,  and  notwithstanding  the  seeming  inconsistency  in 
holding  that  the  mortgagee  is  bound  by  some  of  the  provisions 
preceding  line  56  and  not  by  others,  it  is  quite  evident  that 
under  the  various  “loss  payable”  clauses  in  current  use,  the 
courts  are  inclined  to  distinguish  between  forfeiture  and  can¬ 
cellation  and  to  hold  that  in  order  to  effect  legal  cancellation 
as  to  the  mortgagee’s  interest  he  must  receive  notice.  A 
clause  could  no  doubt  be  prepared  which  would  relieve  the 
insurer  of  this  necessity,  but  a  policy  containing  such  a  pro¬ 
vision  would  lose  much,  if  not  all,  of  its  value  for  collateral 
purposes  and  be  manifestly  unfair  to  the  mortgagee.  As  a 
matter  of  prudence  notice  should  be  given  both  to  the  insured 
and  the  payee  regardless  of  whether  the  cancellation  is  by  the 
insured  or  the  company. 

It  has  been  held  in  many  well  considered  cases  (although 
there  are'  some  views  to  the  contrary)  that  a  covenant  by  a 
mortgagor  to  keep  the  buildings  upon  the  mortgaged  prem¬ 
ises  covered  by  insurance  for  the  benefit  of  the  mortgagee, 
and  in  event  of  default  thereof  authorizing  the  mortgagee  to 
effect  such  insurance  at  the  expense  of  the  mortgagor,  is  only 
a  personal  covenant  of  the  mortgagor  obligatory  upon  him 
alone,  and  is  not  a  covenant  that  “runs  with  the  land”  or 
which  follows  the  title ;  and  hence  does  not  bind  a  subse¬ 
quent  grantee  of  the  mortgagor  to  keep  insurance  for  the 
benefit  of  the  mortgagee,  nor  can  premiums  paid  therefor 
be  recovered  of  such  grantee,  nor  tacked  to  the  mortgage, 
even  though  his  deed  may  have  been  made  subject  thereto; 
nor  is  the  record  of  the  mortgage  sufficient  legal  notice  to 
bind  either  the  grantee  or  subsequent  mortgagee.  Dunlop 
vs.  Avery,  89  N.  Y.  592;  Reid  vs.  McCrum,  91  N.  Y.  412; 
Farmers  Loan  &  Trust  Co.  vs.  Penn.  Glass  Co.,  186  U.  S. 
434. 

The  closing  paragraph  of  the  mortgagee  clause  has 
reference  to  subrogation  when  there  is  no  liability  to  the 
mortgagor  or  owner,  it  being  very  properly  stipulated  that 
no  subrogation  shall  impair  the  right  of  the  mortgagee  (or 


22 


trustee)  to  recover  the  full  amount  of  his  claim.  This  right 
of  subrogation  is  about  the  only  consideration  for  the  mort¬ 
gagee  agreement  and  affords  the  only  excuse  for  such  a 
contract  being  entered  into. 

When  the  policy  is  in  favor  of  a  first  mortgagee  on 
property  where  land  values  are  high,  subrogation  is  a  val¬ 
uable  right,  but  when  the  policy  is  in  favor  of  a  second 
or  third  mortgagee  its  value  approaches  and  frequently 
reaches  the  vanishing  point,  and  it  is  on  this  account  that 
some  companies  decline  as  a  matter  of  general  practice  to 
issue  a  mortgagee  clause  in  favor  of  a  second  and  third 
mortgagee. 

The  agreement  provides  that  whenever  the  insurance 
company  shall  pay  the  mortgagee  (or  trustee)  any  sum  for 
loss  or  damage  under  the  policy  and  shall  claim  that, 
as  to  the  mortgagor  or  owner,  no  liability  therefor  existed, 
the  company  shall,  to  the  extent  of  such  payment,  be  there¬ 
upon  legally  subrogated  to  all  the  rights  of  the  party  to  whom 
such  payment  shall  be  made,  or  may  at  its  option,  pay  to 
the  mortgagee  (or  trustee)  the  whole  prinicipal  due  or  to 
grow  due  on  the  mortgage  and  shall  thereupon  receive  a 
full  assignment  and  transfer  of  the  mortgage  and  such  other 
securities.  This  would  seem  to  be  about  as  clear  as  it  is 
possible  for  language  to  make  it,  and  would  indicate  to  the 
lay  mind  that  the  insurer  would  have  a  perfect  right  even 
arbitrarily  to  deny  liability  to  the  mortgagor  and  insist  upon 
the  mortgagee  complying  with  the  conditions  of  the  agree¬ 
ment,  and  leave  the  mortgagor  to  pursue  his  remedy  under 
the  policy  in  the  courts  if  he  so  desired ;  but  the  courts 
say  that  the  clause  shall  not  be  construed  to  vest  in  the 
insurance  company  the  right  to  subrogation  upon  the  mere 
assertion  of  claim  unfounded  in  fact ;  that  the  claim  which 
it  may  assert  must  be  valid  and  well  founded.  The  Supreme 
Court  of  Canada  has  held  that  the  insurance  company  is 
not  justified  in  paying  the  mortgagee  and  claiming  subro¬ 
gation  without  first  contesting  the  liability  of  the  mortgagor 
and  establishing  its  immunity  from  liability  to  him,  and  that 
is  practically  the  position  of  those  courts  in  this  country 
which  have  passed  on  the  question.  In  short,  the  mortgagee, 
if  he  desires,  may  decline  to  accept  payment  of  the  loss 
(although  he  seldom  does)  and  insist  upon  a  decision  from 
the  court  of  last  resort  as  to  whether  there  is  a  liability  to 
the  mortgagor  or  owner,  before  he  will  be  compelled  to 
comply  with  the  subrogation  provision.  The  latest  decision 
is  that  of  O’Neill  vs.  Franklin  Fire  Ins.  Co.  in  which  the 
Court  of  Appeals  of  New  York  affirmed  without  opinion  the 
decision  rendered  by  the  Appellate  Division,  159  App.  Div. 

313,  216  N.  Y.  P. - 43  Ins.  Law  Journal  388.  See  also 

Traders  Ins.  Co.  vs.  Race,  142  Ill.  338,  31  N.  E.  392;  Ander¬ 
son  vs.  Saugeen  Mut.  F.  Ins.  Co.,  18  Ont.  Rep.,  355 ;  Bull 
vs.  North  British  Canadian  Investment  Co.  &  Imperial  Fire 


23 


Ins.  Co.,  15  Ont.  Rep.  421,  affirmed  18  Canadian  Supreme 
Reports,  697  Loewenstein  vs.  Queen  Ins.  Co.  (Mo.  S.  C.) 
39  Ins.  Law  Journal,  877. 

To  the  mind  of  the  writer  the  dissenting  views  which 
were  expressed  in  some  of  these  cases  are  much  more  reas¬ 
onable,  logical  and  convincing  than  the  prevailing  opinions 
and  the  following  quotation  from  the  dissenting  opinion  of 
Justice  Kruse  in  the  O’Neill  case  (supra)  undoubtedly  sets 
forth  the  intention  of  the  framers  of  the  mortgagee  agree¬ 
ment. 

“I  think  the  insurance  company  was  entitled  to  an  assignment  of 
the  mortgage.  As  between  the  mortgagee  and  the  insurance  company, 
it  was  not  necessary  for  the  insurance  company  to  show  that  it  was 
not  liable  to  the  mortgagor  and  owner  upon  the  policy.  The  insurance 
company  made  that  claim  and  offered  to  pay  the  mortgagee  the  whole 
principal  due  or  to  grow  due,  with  the  interest,  and  demanded  an 
assignment  of  the  mortgage.  Whether  or  not  the  insurance  shall  be 
applied  as  a  payment  upon  the  mortgage  is  a  question  between  the 
mortgagor  and  the  insurance  company,  in  which  the  mortgagee  has  no 
interest.  I  think  the  mortgagee  has  no  standing  to  contest  that  ques¬ 
tion  with  the  insurance  company.” 

The  Chancery  Court  in  New  Jersey  in  the  case  of  Florence 
E.  Palmer  vs.  John  A.  McFadden,  Guardian,  and  Niagara 
Fire  Ins.  Co.,  has  recently  handed  down  a  decision,  which 
should  certainly  be  reversed  on  appeal.  The  Niagara,  whose 
policy  was  the  only  one  of  three  which  was  payable  to  the 
mortgagee  under  a  mortgagee  clause  without  contribution, 
paid  the  mortgagee  $3,416.67  and  took  an  assignment  of  the 
bond  and  mortgage,  but  its  pro  rata  liability  to  the  insured 
was  only  $1,388.16,  or  $2,028.51  less  than  the  amount  paid. 
The  court  ruled  that  because  the  mortgagee  clause  did  not 
contain  the  contribution  provision,  and  because  the  insurer 
admitted  some  liability  to  the  insured,  as  distinguished  from 
no  liability,  the  insured  was  entitled  to  have  the  bond,  mort¬ 
gagee  and  decree  of  foreclosure  surrendered  for  cancellation. 
In  short,  the  lower  court  virtually  handed  the  insured  $2,028.51, 
and  if  the  judgment  is  affirmed,  she  will  have  made  just  that 
much  clear  profit  by  the  fire. 

The  insurer  should,  equitably,  be  subrogated  to  the  extent 
of  the  excess  payment,  even  in  the  absence  of  an  agreement 
for  subrogation,  and  it  is  not  conceivable  that  this  decision, 
based  as  it  is  upon  a  strained  and  distorted  view  of  the  sub¬ 
rogation  provision,  will  be  permitted  to  stand.  (Note :  This 
decision  was  subsequently  reversed.) 

A  new  mortgagee  clause  is  now  being  considered  by 
various  underwriting  organizations  and  no  doubt  will  soon 
be  promulgated  for  use  in  states  where  the  present  standard 
form  is  not  required  by  law.  It  contains  a  fair  contribution 
provision  and  expressly  stipulates  that  the  insurer  shall  be 
subrogated  fo  the  extent  of  any  excess  sum  for  loss  or  damage 
over  and  above  the  amount  of  its  liability  to  the  mortgagor 
or  owner,  thereby  covering  the  point  raised  by  the  New  Jersey 
Court  in  the  Niagara  case  (supra). 


24 


In  the  absence  of  an  agreement,  express  or  implied,  or  of 
a  clause  in  the  policy  making  the  loss  payable  to  the  mort¬ 
gagee,  or  of  an  assignment  to  the  mortgagee,  the  mortgagee 
has  no  interest  in  a  policy  taken  out  by  the  mortgagor  upon 
his  own  interest,  and  conversely  a  mortgagor  has  no  interest 
in  the  proceeds  of  a  policy  taken  out  in  the  name  of  the 
mortgagee  for  the  purpose  of  protecting  his  interest  only. 

Where  a  policy  is  made  payable  to  a  mortgagee  “as  his 
interest  may  appear,”  there  is  a  conflict  of  authority  as  to 
J  whether  the  mortgagee  is  entitled  to  the  proceeds  arising  from 

the  destruction  of  property  included  in  the  policy,  but  not 
covered  by  the  mortgage.  Cooley’s  Briefs,  3699-3700. 

In  Massachusetts,  Minnesota,  Mississippi  and  North  Caro¬ 
lina,  by  statute,  if  by  an  agreement  with  the  insured  or  by 
the  terms  of  a  policy  taken  out  by  a  mortgagor,  the  whole 
or  any  part  of  the  loss  is  to  be  paid  to  mortgagees,  the  com¬ 
pany  may  pay  the  mortgagees  in  the  order  of  their  priority 
of  claim  and  such  payment  shall  be,  to  the  extent  thereof, 
payment  and  satisfaction  of  the  liability  of  the  company.  In 
Maine,  by  statute,  the  mortgagee  of  real  estate  has  a  lien 
upon  any  policy  of  insurance  against  loss  by  fire  procured 
thereon  by  the  mortgagor,  to  take  effect,  if  the  loss  has  not 
been  paid,  after  filing  of  a  written  notice  with  the  company. 
Cooley’s  Briefs,  3703-3704. 

A  senior  mortgagee  whose  mortgage  provides  for  insur¬ 
ance  has  no  lien  on  the  proceeds  of  a  policy  which  by  the 
terms  of  the  policy  is  made  payable  to  a  junior  mortgagee, 
except  to  the  extent  of  the  excess,  if  any.  Dunlop  vs.  Avery, 
89,  N.  Y.  592. 

If  a  mortgagor  complies  with  the  mortgage  agreement 
and  takes  out  insurance  for  the  benefit  of  the  mortgagee  and 
the  insurance  company  becomes  insolvent,  the  mortgagee  has 
no  lien  against  insurance  taken  out  by  the  mortgagor  to  pro¬ 
tect  his  own  interest.  Nordyke  &  Marmon  Co.  vs.  Gery,  112, 
Ind.  535,  13  N.  E.  683,  2  Am.  St.  Rep.  219. 

The  interest  of  a  mortgagee  under  the  mortgagee  clause 
or  “loss  payable”  clause  takes  precedence  over  that  of  an 
assignee  or  trustee  in  bankruptcy,  an  assignee  of  claim  or  an 
attaching  creditor.  The  equitable  interest  gained  by  an  as¬ 
signment  of  a  policy  as  collateral  security  will  prevail  over 

the  claim  of  an  unsecured  creditor  garnisheeing  the  company. 
.  Wakefield  vs.  Martin,  3  Mass.  558.  The  lien  of  a  mortgagee 

J  who  has  been  promised  insurance,  is  superior  to  that  of  an 

assignee  of  the  policy  after  loss,  who  takes  with  knowledge 
of  the  equity  of  the  mortgagee  (Nichols  vs.  Baxter,  5  R.  I.  491) 
or  whose  assignment  is  supported  only  by  a  precedent  debt. 
An  assignee  of  a  mortgage  containing  a  covenant  to  insure 
was  held  entitled  to  priority  as  to  a  policy  taken  out  by  the 
mortgagor,  over  an  assignee  in  insolvency  of  the  mortgagee. 
Branch  vs.  Milford  Sav.  Bk.,  51  Kan.  App.  246,  47  Pac.  555. 


25 


The  right  of  an  attaching  creditor  has  also  been  held  sub¬ 
ordinate  to  this  lien ;  Providence  County  Bank  vs.  Benson,  24 
Pick  (Mass.)  204.  But  where  the  claim  under  the  policy  has 
been  assigned  after  a  loss  to  an  innocent  purchaser  for  value, 
it  has  been  held  that  his  equity  was  superior  to  that  of  the 
mortgagee.  Swearingen  vs.  Hartford  Fire  Ins.  Co,,  56  S.  C. 
355,  34  S.  E.  449.  The  lien  of  an  assignee  of  a  mortgage, 
who  has  been  promised  insurance  by  its  assignor,  is  enforce¬ 
able  as  to  insurance  taken  out  by  his  assignor  after  the  pur¬ 
chase  by  such  assignor  of  the  mortgaged  property.  Hyde 
vs.  Hartford  Fire  Ins.  Co.  (Neb)  97  N.  W.  629.  Cooley’s 
Briefs,  3706. 

It  will  be  freely  conceded  that  those  who  loan  money  on 
real  estate  are  entitled  to  fire  insurance  protection  unaffected 
by  the  acts  or  neglect  of  parties  other  than  themselves.  The 
contracts  in  their  favor  must  necessarily  be  less  restrictive 
in  their  terms  than  those  in  favor  of  the  property  owners,  but 
the  propriety  of  granting  indemnity  to  a  mortgagee  under  any 
kind  of  special  contract  attached  to  the  policy  of  the  mort¬ 
gagor  without  some  special  consideration  is,  to  say  the  least, 
a  matter  of  grave  doubt,  to  say  nothing  of  granting  him  a 
contract  almost — if  not  entirely — free  from  conditions,  for 
no  consideration  other  than  the  right  of  subrogation,  which 
in  many  instances  may  be  of  no  value  whatever. 

Although  much  has  been  said  and  written  on  this  im¬ 
portant  subject  and  many  decisions  have  been  rendered,  still 
the  last  word  has  not  yet  been  spoken  and  we  may  confidently 
expect  new  phases  of  the  question  to  present  themselves  for 
consideration  and  adjudication. 


26 


Fire  Loss  Settlements 


FIRST  LECTURE 


BY 

J.  T.  DARGAN,  Jr. 

Assistant  General  Adjuster 


(5ia) 


THE  HOME  INSURANCE  COMPANY 

NEW  YORK 


mb  i  w 


t 


Fire  Loss  Settlements 


First  Lecture 


The  new  Standard  Fire  Insurance  Policy  of  the  State'  of 
New  York,  under  the  head  of  “Requirements  in  Case  of  Loss,” 
states  in  part: 

‘‘The  insured  shall  give  immediate  notice,  in  writing,  to  this 
Company,  of  any  loss  or  damage,  . ” 

By  this  is  meant  that  the  insured  or  his  legal  representatives 
shall,  either  personally  serve  upon  the  insurance  company’s 
authorized  agent,  or  shall  place  in  the  mails  a  written  notifica¬ 
tion  of  the  loss,  addressed  to  the  agent  or  to  the  company, 
and  in  said  notice  a  mere  statement  giving  the  policy  number 
and  date  of  the  loss  should  suffice.  We  have  numerous 
decisions  under  the  old  form  of  policy  where  a  question  has 
been  raised  by  the  insurance  company  as  to  the  meaning  of 
“immediate  notice,”  the  trend  of  which  would  seem  to  place 
upon  the  insured  the  responsibility  of  compliance  with  this 
very  essential  condition  of  the  policy  within  a  reasonable 
number  of  days,  provided  no  unusual  circumstances  prevented. 
For  instance,  it  has  been  held  that  from  eleven  to  fourteen 
days  could  not  be  said  to  have  been  “immediate  notice.”  If, 
on  the  other  hand,  the  insured,  through  a  chain  of  circum¬ 
stances,  was  unable  to  notify  the  company  in  writing  within 
two  or  three  weeks,  I  am  very  much  inclined  to  believe  that 
the  average  court  would  place  upon  the  jury  the  entire  respon¬ 
sibility  of  determining  whether  the  insured  could  be  said  to 
have  acted  with  due  diligence.  A  verbal  notice  to  an  agent 
could  not  be  said  to  be  an  act  on  the  part  of  the  insured  in 
compliance  with  this  condition  of  the  policy. 

The  layman  would  ask,  why  should  an  insurance  com¬ 
pany  rigidly  insist  upon  strict  compliance  with  the  foregoing 
provision.  In  answer  to  this  it  could  be  said  that  in  the 
event  of  a  partial  loss,  the  salvage  or  what  remains  would 
be  adversely  affected  by  the  insured’s  failure  to  give  imme¬ 
diate  notice,  and  again — in  the  event  of  say  a  total  loss,  the 
insurance  company  would  not  have  an  opportunity  of  viewing 


1 


the  remains,  nor  of  investigating  the  cause  of  the  fire  until 
the  general  public  had  been  given  access  to  the  premises, 
and  by  either  walking  upon  the  debris  or  carting  away 
portions  of  the  salvage,  had  so  materially  changed  the  appear¬ 
ance  of  the  premises  as  to  lead  an  adjuster  to  view  the  situa¬ 
tion  from  an  entirely  different  aspect. 

Following  the  above  provision,  the  present  New  York 
Standard  Fire  Policy  goes  on: 

“Protect  the  property  from  further  damage,  forthwith  separating 
the  damaged  and  undamaged  personal  property,  put  it  in  best  possible 
order,  furnish  a  complete  inventory  of  the  destroyed,  damaged  and 
undamaged  property,  stating  the  quantity  and  cost  of  each  article  and 
the  amount  claimed  thereon . 

There  is  probably  no  vital  condition  of  the  policy  more  univer¬ 
sally  disregarded  at  the  expense  of  the  insurance  companies 
than  this  very  reasonable  requirement.  The  reason,  leaving 
out  the  question  of  fraud,  is  undoubtedly  apprehension  on 
the  part  of  the  insured  that  his  act  may  be  construed  to  his 
eventual  disadvantage.  He  is  usually  told,  particularly 
by  those  who  furnish  free  advice,  that  he  should  do  nothing 
until  the  arrival  of  the  adjuster.  A  perishable  stock  may  be 
involved,  and  the  company,  through  failure  to  receive  prompt 
advices,  may  not  be  able  to  arrange  for  an  inspection  by  its 
adjuster  for  a  week  or  ten  days  following  the  fire,  and  in 
this  period  of  time  if  the  insured  does  not  attempt  to  pro¬ 
tect  the  property  from  further  damage,  a  total  loss  may 
result.  Fortunately  insurance  companies  are  blessed  with  a 
very  high  degree  of  intelligence  in  the  personnel  of  their  local 
representatives,  and  it  is  seldom  that  salvage  is  permitted  to 
greatly  deteriorate  without  some  effort  being  made  to  pro¬ 
tect  or  preserve  the  interests  of  all  concerned. 

Another  feature  which  no  doubt  acts  as  a  deterrent  to 
the  insured  is  his  fear  that  a  separation  of  the  damaged  and 
undamaged  property  and  a  general  clean-up  of  the  premises 
will  reduce  the  extent  of  the  true  loss  in  the  eyes  of  the 
adjuster.  This  belief  is  utterly  unwarranted,  and  if  through 
educational  means  the  public  could  be  led  to  realize  that  their 
interests  would  not  be  adversely  affected  by  a  compliance  with 
this  condition  of  the  policy,  adjustments  would  be  easier  for 
all  concerned,  and  losses  of  magnitude  would  be  settled  with 
greater  dispatch  and  less  delay  and  friction.  The  average 
insured  has,  as  a  rule,  no  idea  of  the  true  loss  in  the 
event  of  a  partial  loss,  whereas  if  he  would  comply  with  the 
foregoing  condition  of  the  policy, — and  in  doing  this  he 
would  be  forced  to  inspect  each  item  of  merchandise  or  prop¬ 
erty, — he  would,  following  a  separation  of  the  damaged  and 
undamaged  property  and  the  preparation  of  a  complete  in¬ 
ventory,  be  in  a  decidedly  better  position  to  present  his  claim 
in  an  intelligent  manner. 

In  scheduling  damaged  property,  the  item  should  be 
extended  on  the  basis  of  the  cost  price,  and  upon  each  item 


the  insured  should  assess  the  damage  claimed.  The  manner  in 
which  the  adjuster  arrives  at  the  Sound  Value  and  Loss  and 
Damage  will  be  treated  later. 

Following  the  above  quoted  provision  of  the  policy,  the 
New  York  Standard  Form  continues : 

“The  insured  shall,  within  sixty  days  after  the  fire,  unless  such 
time  is  extended  in  writing  by  this  Company,  render  to  this  Company 
a  proof  of  loss,  signed  and  sworn  to  by  the  insured,  stating  the  knowl¬ 
edge  and  belief  of  the  insured  as  to  the  following . ” 

This  clause  as  it  reads,  is,  of  course,  very  easy  to  understand, 
though  unfortunately  the  various  states  have  either  enacted 
laws  or  permitted  decisions  whereby  there  is  great  variance 
in  the  respective  positions.  For  instance,  New  York  State 
has  rigidly  adhered  and  given  full  support  to  this  condi¬ 
tion  of  the  policy,  and  in  consequence  if  an  insured  does  not 
within  sixty  days — unless  such  time  has  been  extended  by  the 
company — file  some  form  of  paper  which  may  be  said  to  be 
in  substantial  compliance  with  this  provision,  all  right  of 
recovery  under  the  policy  involved  is  forfeited.  However, 
as  compared  with  this,  the  state  of  New  Jersey  forces  an 
insurance  company  to  make  a  demand  upon  the  insured  for 
compliance  with  this  provision,  and  in  addition  furnish  said 
insured  with  a  blank  Proof  of  Loss.  Other  states  vary  in 
their  position,  and  it  is  therefore,  necessary  to  consider  the 
subject  with  reference  only  to  a  specific  state.  In  New  York 
State,  as  stated,  Proof  of  Loss  must  be  served  upon  the  com¬ 
pany  or  its  duly  authorized  agent  within  sixty  days,  and  by  this 
is  meant  not  sixty-one  days,  but  exactly  within  sixty  days. 

The  form  of  policy  under  consideration  following  the 
above  condition  goes  into  considerable  detail  as  to  what  shall 
constitute  a  Proof  of  Loss,  and  any  individual  of  average 
intelligence  should  have  no  difficulty,  even  without  the  assist¬ 
ance  of  technical  advice,  in  complying  with  this  provision. 
The  policy  requirement  following  the  last  quoted  provision, 
states : 

“Render  to  this  Company  a  proof  of  loss,  signed  and  sworn  to 
by  the  insured,  stating  the  knowledge  and  belief  of  the  insured  as  to 
the  following :  the  time  and  origin  of  the  fire,  the  interest  of  the  in¬ 
sured  and  of  all  others  in  the  property,” 

Bv  interest  of  the  insured  and  others  in  the  property  is  meant 
those  individuals  or  business  concerns  which  may  be  interested 
either  as  sole  or  part  owners  or  as  mortgagees  or  lienors. 

The  policy  requirement  proceeds: 

“the  cash  value  of  each  item  thereof  and  the  amount  of  loss  or 
damage  thereto,” 

One  of  the  most  difficult  problems  of  an  adjuster  is  to  secure 
the  insured’s  agreement  to  what  may  be  termed,  the  “Cash 
Value”  of  the  property  involved  at  the  time  of  loss.  What 
may  have  been  paid  for  property  prior  to  the  loss  does  not 
necessarily  govern  as  to  the  sound  value  at  the  time  of  the 
loss.  For  instance,  the  market  vajue  of  the  commodity 


3 


involved  may  have  either  noticeably  increased  or  decreased 
since  its  purchase  by  the  insured.  In  considering  a  fair  and 
reasonable  interpretation  of  what  constitutes  cash  value,  it 
should  be  borne  in  mind  that  the  New  York  Standard  Fire 
Policy  covering  real  or  personal  property,  is  a  contract  of 
indemnity ;  it  is  never  a  wagering  contract,  nor  is  it  a  gamb¬ 
ling  agreement — barring  of  course  any  added  provision  to 
the  contrary.  Its  provisions  when  taken  together  are  drawn 
in  order  to  indemnify  the  insured  for  what  may  have  been  lost , 
less,  of  course,  any  proper  deduction  by  reason  of  the  applica¬ 
tion  of  such  subsequent  or  added  provision  as  Co-insurance, 
Average  or  Three-quarter  Value  Clauses.  If,  therefore,  in 
reaching  an  agreement  with  an  insured  as  to  the  meaning  of 
cash  value,  a  figure  should  be  arrived  at  exceeding  either 
the  true  value  of  the’  property  involved  or  the  cost  to  replace 
at  time  of  fire,  an  amount  will  be  paid  exceeding  the  true  in¬ 
tent  of  the  policy  as  well  as  the  legal  indemnity  or  protection 
afforded  thereunder. 

In  the  beginning  or  on  the  face  of  the  policy,  you  will 
appreciate  the  company  agrees  to  insure 

“John  Doe,  and  legal  i  epresentatives,  to  the  extent  of  the 
actual  cash  value  (ascertained  with  proper  deductions  for  deprecia¬ 
tion)  of  the  property  at  the  time  of  loss  or  damage,  but  not  exceeding 
the  amount  which  it  would  cost  to  repair  or  replace  the  same  with 
material  of  like  kind  and  quality  within  a  reasonable  time  after  such 
loss  or  damage,  without  allowance  for  any  increased  cost  of  repair 
or  reconstruction  by  reason  of  any  ordinance  or  law  regulating  con¬ 
struction  or  repair  and  without  compensation  for  loss  resulting  from 
interruption  of  business  or  manufacture,  etc.” 

This  provision  gives  the  company  the  right  to  insist  upon 
an  adjustment  based  upon  the  actual  cost  to  replace  the  prop¬ 
erty  damaged  or  destroyed  at  time  of  fire,  and  in  the  case  of 
several  commodities  the  “market  price”  has  been  accepted 
by  the  companies  as  a  proper  basis  of  adjustment.  The 
better  or  more  universally  known  commodities  where  a  market 
quotation  at  or  nearest  the  scene  of  the  loss  governs,  are 
grain  and  cotton.  The  justice  of  fixing  the  sound  value  on 
basis  of  market  quotation  in  the  case  of  these  two  staple  prod¬ 
ucts,  is  due  to  the  fact  that  the  cost  to  produce  is  almost  an 
unascertainable  quantity,  so  far  as  the  average  insured  is 
concerned,  as  due  to  the  existence  of  “exchanges”  in  several 
of  our  larger  cities,  both  cotton  and  grain  are  freely  traded 
in,  and  in  consequence  numerous  changes  occur  in  owner¬ 
ship.  In  the  case  of  commodities  where  there  is  no  market 
quotation,  the  proper  basis  of  adjustment  in  fixing  the  sound 
value  is  to  ascertain  the  cost  to  produce  in  the  event  that  no 
change  has  taken  place  in  either  cost  of  labor  or  the  cost  of 
the  items  which  go  to  make  up  the  finished  product,  pro¬ 
vided  of  course,  the  property  in  question  cannot  be  replaced 
at  less  than  cost  to  produce. 

In  the  event  that  there’  is  no  provision  in  the  policy 
concerning  the  basis  of  adjustment,  other  than  the  foregoing 


4 


provision,  the  market  price  as  well  as  the  cost  to  produce 
is  the  universally  accepted  and  proper  basis  of  adjustment, 
and  never  in  any  instance  is  the  sales  price  to  be  used  in 
computing  the  sound  or  actual  cash  value.  The  sales  value 
may  be  covered,  but  this  must  be'  clearly  stated  in  the  policy, 
or  the  anticipated  profits  may  be  covered,  but  this  must  also 
be  clearly  provided  for  in  the  contract. 

After  the  insured  has  prepared  a  statement  setting  forth 
the  cash  value  at  time  of  loss,  the  loss  or  damage  should  be 
extended  under  each  item  and  the  total,  of  course,  may  be 
said  to  be  the  most  vital  feature  of  the  entire  insurance  con¬ 
tract.  A  proper,  reasonable  and  just  manner  of  fixing  the  loss 
or  damage  on  each  item  involved  is  reached  in  the  case  of  say  a 
retail  merchant,  by  taking  into  consideration  the  basis  upon 
which  the  damaged  merchandise  may  be  sold  at  the  same 
percentage  of  profit  as  would  have  been  obtained  from  the 
undamaged  merchandise,  had  there  been  no  loss.  That  is,  the 
insurance  company  cannot  expect  to  force  a  merchant  to  con¬ 
tinue  in  business  selling  damaged  merchandise  without  ob¬ 
taining  a  reasonable  profit  for  his  efforts.  In  other  words  if 
a  stock  of  merchandise  could  be  said  to  have  an  actual  cash 
value  at  time  of  loss  of  $10,000  and  it  could  also  be  said  that 
■the  merchandise  in  question  had  been  damaged  to  the  extent 
of  50%,  then  the  ordinary  interpretation  would  be  that  the 
insurance  company  should  pay  $5,000.  This  would  be  a  fair 
and  reasonable  settlement,  provided  the  merchant  could  dis¬ 
pose  of  the  damaged  goods  for  $5,000  plus  a  reasonable  profit. 
The  insurance  company  could  not  expect  to  force  the  mer¬ 
chant  to  continue  business  for  several  months  and  merely 
obtain  the  net  sum  of  $5,000  but  must  in  addition,  be  willing, 
as  stated,  to  afford  the  insured  the  opportunity  of  making 
a  reasonable  profit  from  the  continued  sale  of  the  damaged 
goods,  unless  by  agreement  all  salvage  should  be  sold  as 
a  unit. 

Quoting  further  from  the  policy  provision  with  reference 
to  the  insured’s  duty  in  connection  with  filing  a  proof  of 
loss,  it  is  stated  the  insured  shall 

“render  to  this  Company  a  Proof  of  Loss . stating . 

all  encumbrances  thereon,  all  other  contracts  of  insurance,  whether 
valid  or  not,  covering  any  of  said  property,” 

By  encumbrances  is  meant  a  mortgage  or  lien  granted  by  the 
insured  to  another,  usually  as  a  result  of  money  obtained  as 
a  loan  by  the  owner  of  the  property  involved.  All  insurance, 
whether  valid  or  not,  must  be  fully  set  forth  in  the  proof  of 
loss.  For  instance,  several  policies  involved  may  be  said  to 
be  invalid  and  the  insured  may  be  utterly  unable  to  recover 
anything  as  a  result  of  the  loss,  but  notwithstanding  this 
the  invalid  policies  in  question  must,  at  least  in  the  statement 
or  apportionment  of  the  total  insurance,  bear  their  propor¬ 
tionate  part  of  the  loss. 


f 


The  insured  is  further  required  to  note : 

“any  changes  in  the  title,  use,  occupancy,  location,  possession  or 
exposures  of  said  property  since  the  issuing  of  this  policy.” 

By  this  is  meant  that  the  insured  must  incorporate  or  state  in 
the  proof  any  information  concerning  a  sale  of  any  or  all  of 
the  property  covered,  and  also  any  change  in  the  use  to  which 
the  property  may  have  been  put,  such  as  changing  an  ordi¬ 
nary  dwelling  to  a  hotel.  If  any  property  has  been  moved 
from  the  location  as  stated  in  the  policy,  this  must  be  clearly 
shown  in  the  proof,  or  if  a  change  in  possession  has  occurred, 
this  must  be  incorporated.  The  insured  is  further  required  to 
note  in  the  proof  any  exposures,  such  as  new  buildings  or 
property  placed  or  erected  near  the  subject  of  insurance  since 
the  issuance  of  the  policy. 

Continuing  the  policy  requirement : 

“By  whom  and  for  what  purpose  any  building  herein  described 
and  the  several  parts  thereof  were  occupied  at  the  time  of  fire.” 

The  insured  is  required  to  insert  in  the  proof  a  statement 
giving  the  names  of  occupants  and  the  nature  of  their  business 
at  the  time  of  the  loss. 

The  policy  requirement  further  continues : 

“and  shall  furnish  a  copy  of  all  the  descriptions  and  schedules 
in  all  policies  and  if  required,  verified  plans  and  specifications  of  any 
building,  fixtures  or  machinery  destroyed  or  damaged.” 

The  latter  part  of  this  requirement,  you  will  note,  is  not  a 
mandatory  one,  unless  the  insured  shall  be  notified  by  the 
company  that  such  information  must  be  furnished.  In  those 
cases,  however,  where  the  insurance  company  makes  specific 
demand  upon  the  insured  for  the  production  of  the  data  spe¬ 
cified,  proper  or  reasonable  compliance  on  the  part  of  the 
insured  must  be  shown. 

Continuing  the  policy  requirement : 

“The  insured,  as  often  as  may  be  reasonably  required,  shall 
exhibit  to  any  person  designated  by  this  Company  all  that  remains  of 
any  property  herein  described,  and  submit  to  examinations  under 
oath  by  any  person  named  by  this  Company,  and  subscribe  the  same.” 

The  effect  of  this  condition  is  that  the  insured  must 
exhibit  or  show  to  the  company  representative  all  that  remains 
of  any  property  involved,  and  the  insured  must  also  submit 
to  an  oral  examination  under  oath,  either  at  the  scene  of  the 
loss  or  a  location  agreeable  to  both  parties  at  interest.  The 
company  cannot  require  the  insured  to  make  a  specific  trip  to 
its  office  to  answer  under  oath  questions  and  interrogatories, 
but  must  designate  a  reasonable  place.  The  insured’s  failure 
to  appear  for  examination  under  oath  at  a  designated  reason¬ 
able  time  and  place  is  a  bar  to  recovery  under  the  policy. 
On  the  other  hand,  the  insurance  company  must  not  make  an 
unreasonable  or  improper  demand  either  as  to  time  or  place. 
That  is,  the  insurance  company  should  not  wait  until  approxi¬ 
mately  the  expiration  of  sixty  days  from  the  date  of  proof 
and  then  demand  an  examination  under  oath,  but  if  it  desires 


6 


to  avail  itself  of  this  privilege  or  condition  of  the  policy,  the 
examination  under  oath  must  be  demanded  within  a  reason¬ 
able  time  after  the  proof  of  loss  has  been  hied  by  the  insured, 
and  by  reasonable  time  could  probably  be  said  to  be,  at  any 
time  within  the  sixty  days  following-  the  serving  of  the  proof, 
provided  the  date  set  for  the  examination  is  previous  to  the 
expiration  of  the  sixty  days.  After  the  insured  has  submitted 
to  an  examination  under  oath,  he  is  required  to  subscribe  the 
same  as  the  foregoing  condition  recites,  though  his  failure 
to  do  so  will  not  result  to  the  insurer’s  disadvantage  in  the 
event  the  oath  has  been  administered  to  the  insured  at  the 
beginning  of  the  examination. 

“Requirements  in  case  of  loss”  as  embodied  in  the  policy 
concludes : 

“and  as  often  as  may  be  reasonably  required,  shall  produce  for 
examination  all  books  of  account,  bills,  invoices,  and  other  vouchers, 
or  certified  copies  thereof,  if  originals  be  lost,  at  such  reasonable 
time  and  place  as  may  be  designated  by  this  Company  or  its  repre¬ 
sentative,  and  shall  permit  extracts  and  copies  thereof  to  be  made.” 

Under  this  condition  the  insured  if  requested  is  required  to 
obtain  duplicate  bills  ‘showing  the  cost  of  the  property  in¬ 
volved,  in  the  event  he  cannot  produce  the  originals,  and 
again,  all  books  of  account  must  be  presented  for  the  com¬ 
pany’s  examination  at  such  reasonable  time  and  place  as  may 
be  designated.  The  insured’s  failure  to  show  a  reasonable 
compliance  with  this  condition  would  undoubtedly  result  in 
his  failure  to  make  a  recovery  under  the  policy. 

In  the  entire  foregoing,  stress  or  emphasis  has  been  laid 
on  the  duty  of  the  insured  in  the  event  of  a  loss.  In  the 
following  an  attempt  will  be  made  to  briefly  set  forth  the 
duty  of  the  insurer. 

After  the  insured  has  given  immediate  notice  of  the  loss, 
and  has  to  the  best  of  his  ability  protected  the  property  from 
further  loss  or  damage,  the  insurer  must  arrange  to  have  a 
representative  act  with  the  insured  in  an  attempt  to  deter¬ 
mine  the  value  of  the  salvage  as  well  as  the  amount  of  the 
loss,  and  failing  so  to  do,  must  bear  the  consequences  of  any 
further  loss  or  deterioration  of  the  salvage  by  reason  of 
its  inaction.  For  instance,  in  the  case  of  loss  on  a  perish¬ 
able  stock  of  merchandise,  the  insurer  could  not,  several 
weeks  after  the  date  of  the  loss,  and  after  having  received 
due  notice,  maintain  its  position  in  alleging  that  the  insured 
had  used  poor  judgment  in  handling  the1  salvage  where  it 
had  given  the  insurer  no  advice  nor  made  any  attempt  to 
arrange  for  an  inspection  of  the  damaged  property  by  an 
agent  or  adjuster.  If  the  insured  could  demonstrate  that  he 
had  used  due  diligence  in  protecting  the  property,  the  insurer 
could  not  after  its  failure  to  act  penalize  the  insured  for 
merely  improper  judgment. 

The  appraisal  condition  of  the  new  New  York  Standard 
policy  is  radically  different  as  compared  with  the  old.  For  in- 


7 


stance,  the  new  form  provides  that  following  the  selection  of 
competent  and  disinterested  appraisers  by  the  insured  and  the 
insurer,  an  umpire  shall  be  selected  by  the  appraisers  so 
chosen,  though  failing  for  fifteen  days  to  agree  upon  such 
umpire,  then  upon  request  of  the  insured  or  the  company 
such  umpire  shall  be  selected  by  a  judge  of  a  Court  of  Record 
in  the  city  in  which  the  property  insured  is  located.  The  old 
form  policy  still  in  use  in  some  other  states  contained  no 
provision  concerning  the  selection  of  an  umpire  other  than 
to  state  that  it  was  the  duty  of  the  two  appraisers  to  select 
such  umpire.  This  of  course  resulted  in  numerous  deadlocks. 
That  is,  the  two  appraisers  could  not  agree  upon  an  umpire  and 
so  reported  to  the  insured  and  insurer,  and  in  consequence 
either  a  new  appraisal  was  resorted  to  or  the  insured,  upon 
failure  of  the  appraisal,  thereupon  filed  suit.  Theoretically 
the  new  appraisal  condition  is  fair  and  reasonable.  Prior 
to  entering  into  an  appraisal  there  must  be  a  failure  to  agree 
as  to  the  amount  of  loss  or  damage  and  the  appraisal  con¬ 
dition  of  the  policy  may  as  stated  be  resorted  to  by  the  insurer 
or  the  insured  upon  written  demand  of  either.  Failure  to  com¬ 
ply  with  a  demand  for  an  appraisal  would  constitute  a  bar 
to  recovery  by  the  insured,  and  likewise  if  the  company  failed 
to  comply  with  the  insured’s  demand  it  could  not  then 
allege  failure  to  complete  an  appraisal,  as  a  defense  in 
event  of  suit,  but  must  allow  the  jury  to  fix  the  loss  or 
damage  in  the'  event  it  should  be  held  liable  for  the  loss. 

In  the  absence  of  fraud,  the  award  of  any  two  of  the  two 
appraisers  and  umpire  so  chosen,  will  be  definitely  binding 
upon  the  insurer  as  well  as  the  insured  as  to  the  sound  value 
and  loss  or  damage.  An  appraisal  award  may  be  set  aside  by 
presentation  of  evidence  by  either  party  showing  collusion  or 
bad  faith  on  the  part  of  the  appraisers  and  again,  it  is 
probable  that  an  award  would  be  ignored  or  set  aside  by 
the  court  in  the  event  definite  proof  could  be  submitted  that 
a  glaring  error  of  magnitude  had  been  made,  provided  it 
could  be  clearly  shown  that  the  error  had  been  committed  by 
the  appraisers  making  the  award. 

The  average  layman  views  the  nomination  of  appraisers 
as  the  selection  of  representatives  of  either  side,  though  such 
is  entirely  contrary  to  the  meaning  as  well  as  the  wording  of 
the  policy,  which  states  that  the  insured  as  well  as  the  com¬ 
pany  shall  select  “a  competent  and  disinterested  appraiser.” 

Following  the  insured’s  compliance  with  all  conditions 
of  the  policy  including  those  demanded  by  the  company  in 
addition  to  those  as  incorporated  in  the  policy,  the  company 
under  the  New  York  Standard  form  of  fire  policy  is  re¬ 
quired  to  pay  the  amount  ascertained  to  be  due  within  sixty 
days  following  the  receipt  of  proof  of  loss  or  the  filing  with 
the  company  of  an  appraisal  award  as  provided.  Upon  fail¬ 
ure  of  the  company  to  pay  the  loss  within  the  required  time, 
the  right  of  an  action  at  law  instantly  accrues  to  the  insured. 


C 


8 


Lines  182,  183  and  184  of  the  New  Standard  Fire  Policy 
of  New  York  states: 

“but  there  can  be  no  abandonment  to  this  Company  of  any  prop¬ 
erty.” 

While  this  should  be  a  very  easily  understood  condition  of 
the  policy,  it  can  be  safely  said  that  there  is  as  much  mis¬ 
conception  as  to  the  company’s  or  the  insured’s  option  in  this 
respect  as  to  any  other  feature  of  the  policy  contract.  The 
average  layman  seems  to  feel  that  once  a  loss  has  occurred 
the  remaining  property  belongs  to  the  insurer.  Such,  how¬ 
ever,  is  not  the  case  under  the  fire  policy,  and  no  court  has,  as 
yet,  rendered  a  decision  which  would  be  in  the  slightest 
contrary  to  this  statement,  unless  of  course,  some  adverse 
act  of  the  insurer  should  have  created  an  unusually  peculiar 
situation  constituting  a  waiver.  Any  remaining  property, 
regardless  of  its  value  or  its  condition,  is  the  property  of 
the  insured,  and  as  stated,  there  can  be  no  abandonment  to 
the  insurer  in  the  absence  of  an  agreement  to  the  contrary. 

The  company  has  the  option,  however,  to  take  all  or  any 
part  of  the  articles  involved  in  a  loss  at  the  agreed  or  ap¬ 
praised  value,  and  in  addition  has  the  added  option  of  repair¬ 
ing,  rebuilding  or  replacing  the  property  lost  or  damaged 
with  other  of  like  kind  and  quality  within  a  reasonable  time, 
though  the  company  must  give  notice  of  its  intention  so  to 
do  within  thirty  days  after  the  receipt  of  the  proof  of  loss. 

It  is  seldom  indeed  that  the  insurer  takes  advantage  of 
the  option  to  repair  or  replace'  the  property  lost  or  damaged, 
though  it  frequently  happens  that  the  company  accepts 
abandonment  of  the  salvage ;  the  latter  being  usually  the 
result  of  failure  to  agree  upon  the  value  of  the  salvage  and 
the  adjuster’s  idea  that  more  may  be  obtained  by  taking 
possession  of  and  selling  same  for  the  benefit  of  the  company 
rather  than  by  paying  the  loss  demanded  by  the  insured  and 
in  consequence  leaving  all  damaged  property  in  his  possession. 

In  probably  ninety-nine  cases  out  of  one  hundred,  the 
insured  gives  verbal  notice  to  the  agent,  and  the  agent  in 
turn  gives  written  notice  to  the  company.  An  adjuster  is 
promptly  named  and  immediately  visits  the  scene  of  the 
loss,  and  in  a  great  majority  of  the  cases  an  amicable  adjust¬ 
ment  is  arrived  at  with  great  dispatch  ;  proofs  of  loss  sub¬ 
mitted,  and  the  loss  instantly  paid.  It  is  seldom  indeed  that 
the  company  takes  advantage  of  its  privilege  to  refrain  from 
payment  until  the  expiration  of  sixty  days  from  the  date 
proof  is  filed.  The  adjuster,  as  a  rule,  assists  the  insured  in 
every  possible  manner,  with  reference  to  the  conservation, 
handling  and  disposition  of  the  damaged  property  as  well  as 
in  the  preparation  of  the  proof  of  loss.  In  the  larger  busi¬ 
ness  centers  numerous  individuals  are  engaged  in  the  busi¬ 
ness  of  representing  the  insured  in  the  adjustment,  and  in 
some  states  the  position  of  adjuster  for  the  insured  is  legally 
recognized,  and  such  individuals  are  licensed  by  the  state. 


9 


It  can  be  safely  stated  in  comparing  procedure  in  fire 
loss  settlements  with  procedure  in  connection  with  the  pay¬ 
ment  of  obligations  arising  under  contracts,  that  there  is 
probably  less  red  tape  or  technical  evasion  resorted  to  than  in 
any  other  business.  For  instance’,  under  the  policy  contract 
there  is  no  obligation  upon  the  company,  except  in  certain 
circumstances,  to  present  the  insured  with  a  blank  proof  of 
loss  or  assist  in  the  preparation  of  said  proof,  though  unless 
the  insured  is  represented  by  a  licensed  public  adjuster,  a 
great  majority  of  insurance  adjusters  relieve  the  insured 
of  all  detail  in  connection  with  the  completion  of  a  proof  of 
loss. 

The  average  insured  seldom,  if  ever,  reads  the  policy  con¬ 
tract  until  a  loss  occurs,  but,  notwithstanding  the  fact  that 
a  certain  percentage  of  policies  can  be  said  to  be  void  due 
to  acts  or  omissions  of  the  insured,  few  companies  endeavor, 
in  the  absence  of  fraud,  to  take  advantage  of  the  situation 
which  exists.  Instead,  as  a  general  rule,  an  amiable  adjust¬ 
ment  is  reached  with  the  insured,  based  upon  the  merits  of 
the  case,  and  prompt  payment  is  made  without  delay,  undue 
formalities  and  unreasonable  or  technical  requirements. 


10 


Fire  Loss  Settlements 


SECOND  LECTURE 


BY 

J.  T.  DARGAN,  Jr. 

Assistant  General  Adjuster 


[psq] 

(®SJ 


THE  HOME  INSURANCE  COMPANY 

NEW  YORK 


Fire  Loss  Settlements 


# 

Second  Lecture 


In  our  discussion  of  the  subject  of  “Fire  Loss  Settle¬ 
ments”  up  to  this  juncture  we  have  given  special  considera¬ 
tion  to  “requirements  in  case  of  loss”  on  the  part  of  the  in¬ 
sured,  and  perhaps  it  will  not  be  amiss  at  this  time,  with¬ 
out  attempting  to  lay  down  any  definite  rules,  to  outline  the 
usual  or  customary  procedure  on  the  part  of  the  company’s 
adjuster  or  representative. 

As  already  explained,  the  usual  procedure  following  the 
actual  occurrence  of  a  fire  is  a  verbal  notification  by  the 
insured  to  the  agent  who  in  turn  either  writes  or  telegraphs 
the  company  interested.  An  adjuster  is  promptly  dispatched 
to  the  scene  of  the  loss  in  the  event  the  claim  exceeds  $100, 
and  if  under  this  figure  the  agent  usually  acts  as  the  adjuster. 
Immediately  upon  arrival  at  or  near  the  scene  of  the  loss 
the  adjuster,  in  accordance  with  custom  and  courtesy,  first 
calls  upon  the  company’s  local  agent  who  in  turn  introduces 
him  to  the  insured. 

Naturally  the  first  impression  formed  upon  the  mind 
of  the  adjuster,  as  well  as  of  the  insured,  as  to  the  personal 
characteristics  or  make-up  of  either  is  quite  important.  If 
the  adjuster  creates  an  unfavorable  impression  upon  the 
insured,  it  is  needless  to  say  that  he  will  enter  into  the 
adjustment  under  a  considerable  handicap,  though  by  his 
later  attitude  he  may  be  able  to  entirely  overcome  this  feeling. 
On  the  other  hand  the  insured  may  adopt  such  thoroughly  im¬ 
proper  or  unreasonable  tactics  that  the  adjuster  may  form  a 
premature  opinion  which  could  not  be  said  to  be  altogether 
favorable. 

As  previously  explained,  many  insured  seem  to  be  under 
the  impression  that  once  a  loss  has  occurred  all  salvage  be¬ 
comes  the  property  of  the  company  and  probably  one  of  the 
first  duties  of  an  adjuster  is  to  explain  in  as  diplomatic  a 
manner  as  possible  that  such  is  not  the  case. 


1 


Many  misunderstandings  which  occur  during  an  adjust¬ 
ment  are  frequently  overcome  by  reference  to  the  company’s 
local  agent  as  intermediary.  The  local  agent,  of  course, 
legally  represents  the  company,  though  at  the  same  time  he 
has  a  distinct  moral  obligation  to  the  insured  up  to  the  extent 
of  straightening  out,  if  possible,  all  difficulties  which  may 
arise  with  justice  and  full  consideration  for  the  rights  of  all 
concerned. 

An  agent  well  versed  in  loss  procedure,  and  in  addition 
with  a  knowledge  of  the  insurance  contract,  is  an  asset  to  an 
adjuster  which  should  not  be  overlooked. 

No  set  rule  can  be  laid  down  as  to  procedure  in  a  fire 
loss  settlement,  as  each  case  is  so  distinctly  different  that  a 
rule  which  might  properly  apply  to  one  loss  would  be  entirely 
out  of  order  in  another  instance. 

After  the  agent  has  discussed  the  loss  with  the  company’s 
adjuster  and  the  latter  has  gotten  in  touch  with  the  insured, 
the  customary  procedure  is  to  ascertain,  if  possible,  the  cause 
of  the  fire,  and  naturally  if  no  criticism  is  to  be  directed 
toward  the  insured,  it  is  the  next  duty  of  the  adjuster  to  take 
up  for  consideration  the  policy  contract.  That  is,  he  should 
first  endeavor  to  ascertain  what  interest  the  insured  has  in 
the  property  involved  and,  without  putting  his  questions  in 
the  form  of  a  legal  examination,  should  endeavor  to  ascertain 
whether  all  requirements  in  the  policy  have  been  substantially 
complied  with. 

Where  an  adjuster  ascertains  that  a  vital  condition  of 
the  policy  has  been  ignored  by  the  insured,  or  becomes  aware 
of  the  fact  that  the  insured  by  some  act  has  voided  an  essential 
condition  thereof,  it  is  the  duty  of  the  company  representative 
at  once  to  bring  to  the  attention  of  the  insured  the  fact  that, 
inasmuch  as  the  contract  has  been  violated,  it  will  be  necessary 
for  both  parties  to  agree  that  all  further  discussion  or  con¬ 
sideration  of  the  loss  is  to  be  without  prejudice.  In  order  to  do 
this  it  is  necessary  for  the  insured  as  well  as  the  adjuster  to 
jointly  execute  what  is  known  as  a  “non-waiver”  agreement. 
This  agreement  is  simply  a  statement  to  the  effect  that  the  act 
of  the  adjuster  in  further  investigating  and  attempting  to  de¬ 
termine  the  amount  of  the  loss  shall  be  done  without  any  com¬ 
mitment  on  the  part  of  the  company  or  without  infringement 
upon  the  rights  of  either.  In  other  words,  it  is  an  endeavor 
on  the  part  of  the  company  to  preserve  the  rights,  which 
properly  have  already  accrued  to  the  company,  and  in  addition 
with  as  little  trouble  as  possible  to  ascertain  by  definite  agree¬ 
ment,  if  this  can  be  done,  the  true  amount  of  the  loss  sustained. 

Practically  no  company  at  this  time  is  in  the  habit  of 
making  a  flat  denial  of  liability  immediately  upon  becoming 
aware  of  a  serious  violation  of  the  policy  contract,  but 
instead  they,  as  a  rule,  wish  to  proceed  further  in  order  to 
determine  the  amount  of  the  loss. 


(# 


2 


The  average  insured,  when  being  confronted  with  this 
situation,  as  a  rule  seeks  legal  advice  unless  perchance  he 
has  every  confidence  in  the  company’s  local  agent,  in  which 
event  there  is  seldom  any  delay  in  agreeing  to  the  adjuster’s 
proposal  that  he  sign  a  “non-waiver”  agreement. 

For  some  unknown  as  well  as  some  unascertainable  rea¬ 
son  an  occasional  public  adjuster,  i.  e.,  the  adjuster  who  repre¬ 
sents  the  insured  and  not  the  company,  advises  his  client  not 
to  sign  a  “non-waiver”  agreement,  evidently  proceeding  upon 
the  presumption  that  by  so  doing  he  would  acknowledge  the 
existence  of  a  policy  violation.  As  an  offset  to  this  I  would 
say  that  I  do  not  recall  one  single  instance  in  my,  it  is  true, 
short  career  as  an  insurance  adjuster,,  where  the  insured’s 
act  in  signing  a  “non-waiver”  agreement  has  reacted  to  his 
disadvantage ;  on  the  contrary  I  think  the  average  court  would 
look  upon  this  as  a  clear  evidence  of  the  insured’s  good  faith 
as  well  as  his  desire  to  do  anything  within  reason  as  sug¬ 
gested  by  the  company. 

Analyzing  the  procedure  in  connection  with  adjustments 
under  various  classes  of  losses  it  might  be  said  that  there  are 
two  separate  and  distinct  methods ;  one  being  the  careful  and 
very  proper  procedure  of  the  conscientious  adjuster  who  en¬ 
deavors  in  a  detailed  and  proper  manner  to>  ascertain  the  true 
loss.  If  such  an  adjuster  is  unfamiliar  with  the  class  of  prop¬ 
erty  damaged  or  destroyed,  he  invariably  seeks  technical  ad¬ 
vice  and  before  making  the  insured  an  actual  offer  of  settle¬ 
ment  is,  as  a  rule,  quite  positive. as  to  the  true  facts  in  the 
case. 

The  other  class  of  adjusters,  who  are  decidedly  in  the 
minority,  are  those  individuals  who  make  what  may  be  termed 
“jump”  settlements,  i.  e.,  following  a  superficial  examination 
of  the  loss,  make  the  insured  an  offer  in  round  figures  of  so 
much  money.  Probably  in  a  great  percentage  of  these  cases, 
the  insured  himself  does  not  know  the  true  extent  of  the  loss, 
and  where  a  loss  is  settled  on  basis  of  a  “jump”  estimate  and 
it  later  develops  that  it  has  been  considerably  underpaid,  the 
company  will  secure  unfavorable  though  properly  earned 
notoriety,  and  in  the  reverse  case  the  insured  will  reap  a 
decided  profit  as  a  result  of  a  settlement  in  this  manner. 

The  act  of  any  adjuster  who  adopts  the  “jump”  estimate 
basis  of  settlement  is  to  be  greatly  regretted,  as  it  is,  I  believe, 
almost  a  physical  impossibility  for  any  one  individual  to  tell 
at  a  glance  just  what  a  loss  may  or  may  not  be. 

It  is  quite  true  that  a  “jump”  settlement  greatly  reduces 
the  necessity  of  detailed  work  or  trouble  as  well  as  annoyance 
on  the  part  of  all  concerned,  but  inasmuch  as  a  settlement 
on  this  basis  has  such  serious  disadvantages  as  well  as  come¬ 
backs,  it  is  hoped  by,  I  believe,  a  great  majority  of  the  com¬ 
panies  that  no  insured  will  accept  settlements  on  this  basis. 

Of  course  where  grave  doubt  exists  as  to  the  extent  of  a 
loss  and  no  amount  of  careful  analysis  or  detailed  work,  as 


3 


well  as  technical  advice,  will  avail  as  to  fixing-  by  agreement 
the  true  amount  of  the  loss,  then  it  very  frequently  happens 
that  a  round  figure  is  agreed  upon  in  compromise,  though  it 
is  clearly  understood  that  such  figure  is  a  compromise  settle¬ 
ment  and  there  can,  therefore,  be  no  comeback  on  the  part 
of  either. 

It  is  my  impression  that  competent  insurance  brokers, 
who  have  the  interest  of  their  clients  at  heart,  would  much 
prefer  to  deal  with  a  careful,  thoroughly  reasonable  adjuster 
than  with  an  individual  who  preferred  to  settle  all  losses 
by  simply  naming  a  round  figure  without  going  fully  and 
carefully  into  the  details  of  the  case.  The  broker  would 
realize  in  the  first  instance,  that  he  would  receive  the  same 
form  of  consideration  and  treatment  on  all  losses,  whereas 
in  dealing  with  the  other  type  of  adjuster,  he  would  be 
apprehensive  as  to  the  eventual  outcome  of  every  case. 

Perhaps  the'  most  important  element  that  enters  into  a 
satisfactory  adjustment  is  with  reference  to  the  make-up  as 
well  as  the  characteristics  of  an  adjuster. 

It  has  been  frequently  stated  that  “an  adjuster  is  born 
and  not  made”  and  I  can  heartily  endorse  this  statement.  I 
have  known  individuals  well  posted  from  every  standpoint 
who  were  utterly  unable  to  accomplish  anything  as  fire  loss 
adjusters. 

Such  individuals  might  be  able  to  readily  ascertain  the 
amount  of  any  loss  probably  with  a  greater  degree  of  accuracy 
than  their  successful  associates,  though  they  were  unable  to 
so  convince  the  insured.  It  is  one  thing,  of  course,  to  be  able 
to  ascertain  a  loss  as  well  as  to  construe  a  policy  contract, 
but  it  is  an  entirely  different  thing  to  be  able  to  convince 
others  of  the  properness  of  one’s  line  of  reasoning. 

From  time  immemorial  the  general  public  has  looked 
upon  the  adjuster  as  the  “bull  dog”  type  of  individual,  though 
from  my  observation  the  most  successful  men  in  the  profes¬ 
sion  are  those  who  have  a  thoroughly  pleasing  and  inoffensive 
demeanor  as  well  as  diplomacy. 

x\s  a  rule  the  average  individual  suffers  not  more  than 
one  loss  during  a  lifetime,  and  naturally  when  this  crisis 
arises,  diplomacy  as  well  as  consideration  on  the  part  of  the 
company  adjuster  accomplishes  more  to  straighten  out  mis¬ 
understandings  than  any  other  form  of  treatment. 

The  policy  contract  becomes  a  thoroughly  personal  one 
at  this  time.  The  insured  when  purchasing  the  policy  does 
so  purely  from  the  standpoint  of  protection  in  the  event  of  a 
casualty  and  in  probably  not  one  out  of  ten  thousand  cases 
is  the  contract  carefullv  read  and  considered.  Naturallv  after 
a  loss  the  insured  reads  the  policy  from  beginning  to  end  and 
no  doubt  notices  that  there  are  several  things  which  should 
have  been  done  which  he  has  failed  to  do.  He  is,  as  a  rule, 
somewhat  excited  or  over-wrought  upon  the  arrival  of  the 
adjuster,  and  unless  the  latter’s  attitude  is  considerate  and 


4 


reasonable  a  serious  and  thorough  misunderstanding  may 
arise. 

As  a  general  rule  no  insurance  adjuster  is  delegated  with 
the  authority  to  waive  a  policy  violation,  his  duty  being  to 
ascertain  the  facts  and,  if  possible,  agree  upon  the  amount 
of  the  loss.  If  one  or  more  essential  condition  of  the  policy 
has  been  violated,  the  adjuster  usually  submits  a  written 
report  to  the  company,  and  upon  receipt  of  definite  instruc¬ 
tions  either  denies  liability,  attempts  a  compromise  settlement, 
if  same  would  seem  to  be  in  order,  or  submits  a  blank  proof 

of  loss  to  the  insured  for  signature  on  basis  of  the  agreed 

loss. 

As  previously  stated,  few  companies  endeavor  to  take 
advantage  of  minor  technicalities  which  frequently  arise,  and 
particularly  where  there  has  been  no  wrong  intent. 

It  is  only  natural  that  the  adjusting  or  loss  department 

of  any  insurance  company  can  be  no  more  human  than  its 

executive  heads,  though  from  my  observation  it  is  my  candid 
opinion  that  more  considerate  treatment  is  accorded  by  fire 
insurance  companies  in  the  adjustment  of  losses  than  in  any 
other  similar  branch  of  commercial  enterprise. 

Perhaps  an  item  of  general  interest  would  be  the  con¬ 
sideration  of  those  claims  properly  coming  within  the  cate¬ 
gory  of  fraudulent  losses. 

Insurance  companies  while  most  considerate  of  an  honest 
and  deserving  claimant,  are  as  a  rule  the  reverse  when  con¬ 
fronted  with  a  fraudulent  claim,  though  unfortunately,  due  in 
g*reat  part  to  our  form  of  judicial  procedure,  fraudulent  claims  - 
are  either  collected  direct  from  the  company  by  reason  of 
ignorance  of  the  latter  as  to  the  existence  of  fraud,  or  through 
the  channel  of  the'  courts. 

It  is  seldom  indeed  that  an  insurance  company  will  with¬ 
stand  suit  unless  a  positive  as  well  as  a  g*ood  defense  exists. 

It  has  always  been  the  writer’s  theory  that  a  fraudulent 
claim  will  at  some  stage  of  the  adjustment  or  investigation 
be  easily  detected.  It  is  very  seldom  that  the  individual  who 
has  deliberately  burned  his  property  will  not  leave*  uncovered 
some  vital  fact  or  feature  which  will,  when  discovered,  place 
the  loss  within  the  proper  category.  For  instance,  I  recall 
one  distinct  case  where  a  very  beautiful  set  of  books  had 
been  presented  to  the  adjuster  bv  the  insured  to  substantiate 
his  claim  for  loss  of  a  stock  of  merchandise,  and  the  ad¬ 
juster  when  casually  examining  the  last  detailed  inventory 
suddenly  detected  the  fact  that  one  page  of  the  inventory  was 
dated  a  year  ahead  of  the  date  of  loss.  This  of  course'  is  con¬ 
trary  to  all  rules  of  human  nature.  One  will  frequently  in 
the  first  part  of  a  year  insert  a  date  through  error  or  from 
habit,  as  the  past  year,  yet  I  do  not  know  of  any  individual 
who  has  ever  through  error  or  habit  inserted  a  coming  year 
as  the  date  upon  which  an  instrument  or  document  was 
drawn  up. 


Perhaps  one  of  the  greatest  assets  or  qualities  for  an 
adjuster  to  have  is  a  thorough  knowledge  of  human  nature. 
Those  company  representatives  who  proceed  upon  the  theory 
that  all  losses  are  questionable,  seldom,  if  ever,  are  elevated 
to  important  positions  by  the  company.  On  the  other  hand 
the  adjuster  who  considers  every  one  honest  is  not  only  a 
costly  investment  for  his  company,  but  he  is  in  addition 
a  menace  to  society  by  reason  of  the  fact  that  “loose”  adjust¬ 
ments  are  unquestionably  responsible  for  additional  or  further 
losses. 

Perhaps  if  our  laws  were  a  little  more  stringent  with 
respect  to  responsibility  in  connection  with  the  cause  of  a  fire, 
insurance  companies  would  be  able  to  afford  the  necessary 
protection  for  a  much  more  reasonable  rate  of  premium  than 
at  present.  In  France,  I  believe,  as  well  as  in  some  other 
foreign  countries,  every  fire  is  properly  chargeable  to  the 
negligence  of  some  individual.  For  instance,  where  a  loss 
occurs  the  proprietor  or  occupant  is  usually  placed  under  ar¬ 
rest  until  he  establishes  his  innocence  both  with  respect  to 
fraud  as  well  as  undue  carelessness.  If  the  loss  is  due'  say 
to  a  structural  defect  of  the  building,  the  contractor  or  builder 
is  next  interrogated  by  the  authorities,  and  he  in  turn  may  be 
able  to  demonstrate  that  the  building  was  erected  in  strict 
accordance  with  the  plans  and  specifications.  The  next  in¬ 
dividual  questioned  is  the  architect  who  may  be  adjudged 
guilty  of  carelessness  or  improper  judgment  in  connection 
with  the  origin  of  the  fire. 

The  courts  of  this  country,  due  to  our  system  of  legal 
procedure,  have  given  the  insurance  companies  as  well  as  the 
public  little  assistance  in  connection  with  the  segregation  of 
fraudulent  and  accidental  losses ;  apparently  confining  their 
verdicts  wholly  to  the  contract  and  not  to  the  apparently  true 
facts  in  the  case. 

Without  going  into  a  technical,  or  attempting  a  far  reach¬ 
ing  legal  discussion  of  the  conditions  of  the  present  New  York 
Standard  Policy,  it  will  probably  not  be'  amiss  to  take  up  for 
consideration  and  briefly  consider  each  essential  condition. 

In  the  foregoing  the  first  provision  of  the  policy — 

“does  insure  John  Doe  and  legal  representative,  to  the  extent 
of  the  actual  cash  value,  etc.” 

was  quoted  in  full,  and  following  this  appears 

“against  all  DIRECT  LOSS  AND  DAMAGE  BY  FIRE  and 
by  removal  from  premises  endangered  by  fire,  except  as  herein 

provided,  to  an  amount  not  exceeding  . ! .  Dollars 

to  the  following  described  property  while  located  and  con¬ 
tained  as  described  herein,  or  pro  rata  for  five  days  at  each 
proper  place  to  which  any  of  the  property  shall  necessarily  be 
removed  for  preservation  from  fire,  but  not  elsewhere,  to  wit : 
as  per  printed  form  attached,  duplicate  of  which  is  filed  in 
this  office.” 


6 


* 


Following  this  provision  a  printed  form  is  usually  at¬ 
tached  to  the  policy  briefly  describing  the  character  of  the 
property  insured,  that  is,  whether  it  consists  of  a  building, 
household  furniture,  stock  of  merchandise  or  any  other  real 
or  personal  property.  The  location  or  locations  at  which  the 
property  is  situate  are  then  inserted  in  the  form  and  afterward 
all  clauses  or  permits,  such  as  co-insurance,  lightning,  elec¬ 
tricity,  etc.,  are  inserted. 

Any  permit  or  clause  attached  to  the  form  necessarily 
takes  precedence  over  any  contrary  provision  in  the  policy — 
see  lines  72  to  77  reading: 

“The  extent  of  the  application  of  insurance  under  this  policy 
and  of  contribution  to  be  made  by  this  Company  in  case  of 
loss  or  damage,  and  any  other  agreement  not  inconsistent  with 
or  a  waiver  of  any  of  the  conditions  or  provisions  of  this 
policy,  may  be  provided  for  by  agreement  in  writing  added 
hereto.” 

Though  particular  attention  is  called  to  the  fact  that  the 
foregoing  is  only  true  provided  the  permits  or  added  agree¬ 
ments  are  not  inconsistent  with  or  a  waiver  of  any  conditions 
or  provisions  of  this  policy. 

The  body  of  the  policy,  lines  1  to  200,  begins : 

“This  entire  policy  shall  be  void  if  the  insured  has  concealed 
or  misrepresented  any  material  fact  or  circumstance  concern¬ 
ing  this  insurance  or  the  subject  thereof;  or  in  case  of  any 
fraud  or  false  swearing  by  the  insured  touching  any  matter 
relating  to  this  insurance  or  the  subject  thereof,  whether  be¬ 
fore  or  after  a  loss.” 

The  meaning  of  the  foregoing  is  that  the  policy  shall  be 
void  in  the  event  the  insured  has  deliberately  concealed  or 
misrepresented  any  material  fact  or  circumstance.  For  in¬ 
stance,  in  securing*  insurance  the  insured  may  make  a  direct 
statement  as  to  the  cost  of  the  property  to  him,  as  well  as 
the  age  and  condition  of  the  property,  whereas  upon  investiga¬ 
tion  it  develops  that  an  entirely  different  situation  exists.  As 
I  have’  already  said,  what  an  individual  pays  for  an  article 
or  piece  of  real  property  is  not  necessarily  a  guide  as  to  its 
value  at  the  time  of  any  loss,  though  where  a  deliberate  mis¬ 
statement  is  made  of  anv  material  fact  or  circumstance,  it 
will  unquestionably  be  held  to  void  the  policy.  For  instance, 
the  insured  may,  in  securing  a  certain  policy,  maintain  that 
he  has  no  other  insurance  and  the  company’s  agent  in  granting 
insurance  may  do  so  with  the  distinct  understanding  that 
there  is  no  additional  insurance.  The  policy,  it  is  true,  would 
be  void  by  reason  of  other  insurance  without  notice,  though 
misrepresentation  on  the  part  of  the  insured  would  be  as  vital 
a  defense  as  this  added  condition. 

In  addition  to  the  feature  of  misrepresentation,  the  act 
of  the  insured  in  giving  false  testimony  following  a  loss  will 
be  equally  effective  in  voiding  the  policy. 


7 


Under  the  head  of  “Requirements  in  Case  of  Loss,”  the 
company’s  right  to  examine  the  insured  under  oath  was 
touched  upon,  and  it  may  therefore  be  said  that  when  during 
such  examination  the  insured  gives  false  testimony,  he  may 
by  such  act  create  a  voidance  of  the  policy,  whereas  the  in¬ 
strument  may  at  the  time  of  the  fire  exist  as  a  valid  contract. 

Lines  7  to  11  inclusive  state: 

“This  policy  shall  not  cover  accounts,  bills,  currency,  deeds, 
evidences  of  debt,  money,  notes  or  securities;  nor,  unless 
specifically  named  hereon  in  writing,  bullion,  manuscripts, 
mechanical  drawings,  dies  or  patterns.” 

The  foregoing  condition  hardly  needs  a  detailed  explanation 
other  than  to  state  that  while  bullion,  manuscripts,  mechanical 
drawings,  dies  or  patterns  may  be  and  are  frequently  covered 
under  the  policy  by  specific  endorsement,  yet  never  in  any 
instance  are  accounts,  bills,  currency,  deeds,  evidences  of  debt, 
monev,  notes  or  securities  covered  other  than  for  their  cost 
to  replace.  In  other  words  the  amount  of  ‘a  debt  cannot  be 
covered  except  under  a  very  peculiar  form  of  agreement,  not 
however,  attached  to  the  standard  policy,  though  probably  by 
some  such  institution  as  London  Lloyds,  even  though  the  bill 
or  document  intended  to  be  covered  under  the  policy  may  be 
the  only  true  evidence  of  the  debt.  Deeds  are  frequently  cov¬ 
ered  though  only  for  the  cost  to  replace,  that  is,  the  actual 
clerical  work  incidental  to  duplication.  No  doubt  fire  insur¬ 
ance  is  frequently  carried  on  money,  notes  and  securities, 
though  not,  I  am  quite  sure,  under  the  standard  policy. 

The  policy  proceeds — see  lines  12  to  19  inclusive: 

“This  Company  shall  not  be  liable  for  loss  or  damage  caused 
directly  or  indirectly  by  invasion,  insurrection,  riot,  civil  war 
or  commotion,  or  military  or  usurped  power,  or  by  order  of 
any  civil  authority;  or  by  theft;  or  by  neglect  of  the  insured 
to  use  all  reasonable  means  to  save  and  preserve  the  prop¬ 
erty  at  and  after  a  fire  or  when  the  property  is  endangered 
by  fire  in  neighboring  premises.” 

We  have  had  during  the  present  world  war  a  very  clear 
example  of  the  application  of  the  foregoing,  and  particularly 
with  reference  to  what  has  been  defined  as  a  riot  by  the 
statutes  of  various  states.  The  Statute  of  New  York  declares 
that  the  act  of  three  or  more  persons  may  constitute  a  riot, 
and  therefore  the  destruction  of  property  by  fire  as  a  result 
may  be  said  not  to  be  covered  under  the  policy. 

During  the  progress  of  a  big  fire  it  may  happen  that  the 
civil  authorities  will  cause  the  destruction  of  property  by 
dynamite  or  fire  in  order  to  stop  the  spread  of  the  fire,  and 
naturally  the  property  owners  so  affected  make  claim  under 
a  fire  policy.  This,  however,  is  not  a  legal  claim  under  the 
contract,  and  where  it  can  be  demonstrated  that  property  in¬ 
volved  was  damaged  or  destroyed  by  dynamite  or  fire  by 
order  of  the  civil  authorities,  there  can  be  no  collectible  loss 
under  the  policy. 


8 


The  theft  of  any  portion  of  property  involved  during  a 
fire  is  not  a  loss  coming  under  the  terms  or  conditions  of  the 
policy. 

The  last  portion  of  the  above  quoted  provision  is  seldom 
enforced  by  the  company  due  to  the  fact  that  it  is,  as  a  rule, 
very  difficult  to  demonstrate  to  the  satisfaction  of  a  jury  that 
all  reasonable  means  to  save  and  preserve  the  property  have 
not  been  used.  For  instance,  I  know  of  several  cases  where 
a  storekeeper  has  deliberately  prevented  the  removal  of  a 
stock,  due  to  his  idea  that  the  fire  would  not  reach  his  prem¬ 
ises,  as  he  no  doubt  felt,  and  possibly  very  properly  so,  that 
a  removal  of  the  property  by  the  general  public  would  cause 
greater  damage  than  the  risk  involved  would  warrant  in 
allowing  the  property  to  remain  at  its  present  location.  Of 
course,  where  it  could  be  demonstrated  that  an  insured  had 
every  opportunity  of  removing  the  property  and  deliberately 
failed  to  do  so,  the  company  could  unquestionably  avoid  pay¬ 
ment  of  the  loss. 

Lines  20  to  31  inclusive  state: 

“This  entire  policy  shall  be  void,  unless  otherwise  provided 
by  agreement  in  writing  added  hereto, 

(a)  if  the  interest  of  the  insured  be  other  than  uncondi¬ 
tional  and  sole  ownership;  or  (b)  if  the  subject  of  insur¬ 
ance  be  a  building  on  ground  not  owned  by  the  insured 
in  fee  simple ;  or  (c)  if,  with  the  knowledge  of  the  in¬ 
sured,  foreclosure  proceedings  be  commenced  or  notice 
given  of  sale  of  any  property  insured  hereunder  by  reason 
of  any  mortgage  or  trust  deed ;  or  (d)  if  any  change,  other 
than  by  the  death  of  an  insured,  take  place  in  the  interest, 
title  or  possession  of  the  subject  of  insurance  (except 
change  of  occupants  without  increase  of  hazard)  ;  or  (e)  > 

if  this  policy  be  assigned  before  a  loss.” 

As  you  will  recall,  in  the  foregoing  stress  was  laid  upon 
the  fact  that  fire  insurance  under  the  standard  policy  covers 
an  interest  and  not  simply  a  physical  piece  of  property,  as  in 
the  marine  contract,  and  therefore  the  interest  of  the  insured 
in  the  property  described  must  be  clearly  set  forth  in  the 
policy  or  same  may  be  said  to  be  null  and  void.  For  instance, 
if  insurance  should  be  granted  to  an  individual  who  had  say 
a  half  interest  in  either  a  piece  of  real  or  personal  property 
and  this  fact  was  not  noted  in  the  policy,  the  contract  would 
be  null  and  void  as  to  any  loss  which  might  be  sustained. 

A  building  situate  on  leased  ground,  where  this  fact  is  not 
noted  in  the  policy,  could  not  be  said  to  be  covered,  nor  would 
the  insured  be  able  to  collect  any  loss  under  the  standard 
policy. 

If  the  insured  permitted  foreclosure  proceedings  without 
notifying  the  company,  or  permitted  a  notice  to  be  given  of 
sale  of  any  property  covered  under  the  policy  by  reason  of 
any  mortgage'  or  trust  deed,  the  policy  would  be  void  from 
date  of  such  occurrence. 


9 


If,  following  the  issuance  of  a  policy,  the  insured  should 
die,  it  is  unnecessary  to  secure  an  endorsement  as  the  policy  is 
valid  as  to  the  estate  or  heirs  until  expiration,  though  when 
renewed  should  be  in  name  of  the  estate  or  the  heirs. 

Where  a  building  as  described  is  occupied  as  a  store  or 
blacksmith  shop,  any  change  of  occupancy  may  occur  unless 
the  entire  nature  of  the  business  is  changed,  that  is,  if  a 
dry  goods  store  were  converted  into  a  powder  factory  without 
notice  to  the  company,  the  policy  would  be  void  from  date 
of  change  of  the  occupancy.  The  owner  and  occupant  of  a 
blacksmith  shop  may  in  turn  rent  the  premises  to  another 
individual  who  will  likewise  operate  a  blacksmith  shop,  but 
this  would  not  be  contrary  to  the  policy  provisions. 


10 


Fire  Loss  Settlements 


THIRD  LECTURE 


BY 


J.  T.  D  ARC  AN,  Jr. 

Assistant  General  Adjuster 


(mE) 

(«®J 


THE  HOME  INSURANCE  COMPANY 

NEW  YORK 


Fire  Loss  Settlements 


Third  Lecture 


The  subrogation  provision  of  the  present  New  York 
standard  policy,  lines  197  to  200  inclusive,  reading : 

“This  Company  may  require  from  the  insured  an  assign¬ 
ment  of  all  right  of  recovery  against  any  party  for  loss  or 
damage  to  the  extent  that  payment  therefor  is  made  by  this 
company.” 

is  quite  different  from  this  provision  in  the  old  policy.  The 
request  has  been  made  that  the  rights  of  the  company  under 
this  provision  of  the  policy  be  defined.  The  main  difference 
between  the  subrogation  provision  in  the  old  New  York 
standard  policy  and  the  new  is  that  in  the  latter  it  is  stated 
that : 

“This  company  may  require.. . ” 

whereas  in  the  former  it  is  stated  that : 

“This  Company  shall  on  payment  of  a  loss  be  subrogated.” 

In  the  old  form  there  was  no  provision  whereby  the 
company  could  upon  request  obtain  a  mere  assignment  to  the 
extent  of  its  payment,  unless  it  was  alleged  that  the  fire  was 
caused  by  the  act  or  neglect  of  a  person  or  corporation.  It 
is  quite  true  that  the  right  of  subrogation  accrues  as  a  result 
of  common  law,  provided,  of  course,  the  company  is  clearly 
legally  entitled  to  succeed  to  the  rights  of  the  insured  against 
the  third  person. 

I  believe  that  there  is  a  decision  in  one  state  which 
forces  the  company  upon  payment  of  a  loss  to  make  specific 
demand  for  the  execution  of  a  subrogation  receipt  or  assign¬ 
ment,  though  in  the  absence  of  any  such  decision,  the  right 


1 


of  subrogation  would,  I  believe,  exist  regardless  of  whether 
the  company  did  or  did  not  at  the  time  of  loss  obtain  a  sub¬ 
rogation  receipt.  There  would  seem  to  be  a  distinction  be¬ 
tween  a  subrogation  receipt  and  a  mere  assignment ;  the 
first  being  the  legal  operation  by  which  the  company  in  pay¬ 
ing  the  insured  succeeds  to  the  rights  of  the  insured  against 
the  person  or  corporation  whose  negligence  caused  the  fire, 
whereas  in  the  case  of  an  assignment,  the  company  would 
have  the  privilege  of  insisting  upon  the  execution  of  an  as¬ 
signment  in  its  favor  upon  making  payment  of  loss  to  the 
insured,  and  it  would  not  be  necessary  in  obtaining  such 
assignment  to  make  any  allegation  as  to  the  cause  of  the  fire. 

The  company,  when  making  payment  of  a  loss  which  has 
been  caused  by  the  negligence  of  a  third  person,  invariably 
requires  the  execution  on  the  part  of  the  insured  of  a  sub¬ 
rogation  receipt  or  assignment. 

The  company  in  filing  suit  against  the  person  or  corpora¬ 
tion,  whose  negligence  caused  the  fire,  may  sue  in  its  own 
name  as  assignee,  or  suit  may  be  entered  in  the  name  of  the 
insured,  though,  if  the  latter  procedure  be  adopted,  the 
insured’s  consent  and  acquiescence  must  of  course  be  secured. 

Where  the  loss  sustained  exceeds  the  amount  of  insur¬ 
ance  collected,  the  insured  would  seem  to  have  an  equitable 
right  to  participate  in  the  proceeds  of  the  amount  recovered, 
if  any,  and  in  a  large  percentage  of  cases  suit  is  brought  in 
name  of  the  insured  with  a  side  agreement  whereby  it  is 
stipulated  that  the  company  and  the  insured  shall  participate 
in  the  net  recovery  in  accordance  with  the  amounts  of  their 
respective  interests. 

I  do  not  believe  the  company  has  the  legal  right  to  act 
without  reasonable  regard  for  the  interest  of  the  insured.  In 
other  words,  if  the  insured  sustained  a  loss  far  in  excess  of 
the  insurance,  the  company  could  not,  even  though  it  had 
obtained  the  necessary  subrogation  receipt  or  assignment, 
enter  into  a  compromise  settlement  of  the  claim  with  the  third 
person  ignoring  the  unsatisfied  interest  of  the  insured  in  the 
settlement,  unless  perchance  the  subrogation  receipt  or  assign¬ 
ment,  by  its  terms  and  conditions,  gave  the  company  the  legal 
right  to  do  this. 

No  company,  however,  will  as  a  rule  attempt  to  proceed 
under  a  subrogation  receipt  or  assignment  without  first 
reaching  some  agreement  with  the  insured  concerning  the 
participation  of  his  interest  in  either  a  compromise  settlement 
or  recovery  by  suit. 

The  subrogation  provision  in  the  old  policy  necessitated 
the  company  alleging  that  the  fire  was  caused  by  the  act  or 
neglect  of  some  person  or  corporation,  whereas  the  provision 
in  the  new  policy  does  not  mention  this  feature. 

Unquestionably  the  benefits,  therefore,  of  the  subroga¬ 
tion  provision  in  the  new  policy  are  far  superior  to  those 
afforded  in  the  old. 


Embodied  in  the  New  York  and  New  Jersey  standard 
mortgage  clause  is  the  following  subrogation  provision : 

‘‘Whenever  this  Company  shall  pay  the  mortgagee  (or 
trustee)  any  sum  for  loss  or  damage  under  this  Policy  and 
shall  claim  that,  as  to  the  Mortgagor  or  owner,  no  liability 
therefor  existed,  this  Company  shall,  to  the  extent  of  such 
payment,  be  thereupon  legally  subrogated  to  all  the  rights 
of  the  party  to  whom  such  payment  shall  be  made,  under  all 
securities  held  as  collateral  to  the  mortgage  debt,  or  may  at 
its  option,  pay  to  the  mortgagee  (or  trustee)  the  whole  prin¬ 
cipal  due  or  to  grow  due  on  the  mortgage  with  interest,  and 
shall  thereupon  receive  a  full  assignment  and  transfer  of  the 
mortgage  and  all  such  other  securities ;  but  no  subrogation 
shall  impair  the  right  of  the  mortgagee  (or  trustee)  to  recover 
the  full  amount  of  his  claim.” 

By  the  foregoing  is  meant  that  the  company  merely  steps 
into  the  shoes  of  the  mortgagee,  or  in  other  words  either  buys 
the  mortgage  outright,  if  the  amount  paid  equals  the  face  of 
the  mortgage,  or  if  less  than  the  mortgage,  then  the  company 
simply  acquires  an  interest  in  the  mortgage'  to  the  extent  of 
the  amount  paid. 

As  the  mortgagee  under  the  standard  mortgage  clause 
frequently  has  distinct  advantages  over  the  insured,  it  occa¬ 
sionally  becomes  necessary  or  advantageous  for  the  company 
to  pay  off  the  mortgage  in  full,  even  though  it  is  often  neces¬ 
sary  to  pay  or  advance  more  than  the  amount  of  the  policy. 

The  company  may  be  liable  to  the  mortgagee  but  not 
to  the  insured,  and  by  paying  the  full  amount  of  the  mort¬ 
gage  and  obtaining  an  assignment  thereof,  the  company  may 
then  proceed  to  insist  upon  the  payment  to  it  by  the  insured 
of  the  full  amount  of  the  mortgage,  and  upon  the  insured’s 
failing  to  comply  the  company  has  the  right,  when  the  mort¬ 
gage  becomes  due,  to  foreclose  upon  the  property  and  obtain 
exactly  the  same'  benefits  as  would  have  been  obtained  by  the 
mortgagee  in  the  event  that  no  insurance  had  been  collected. 
It  is  true  that  if  no  fire  had  occurred,  the  mortgagee  would 
have  had  the  added  value  of  the  improvements  as  security  for 
the  payment  of  the  debt,  and  therefore  the  company,  when 
acting  as  the  assignee,  as  a  rule  only  obtains  the  benefit  derived 
from  the  sale  of  the  vacant  land. 

In  those  instances  where  the  company  pays  the  mortgagee 
an  amount  less  than  the'  mortgage  and  acquires  an  interest 
in  the  mortgage  to  the  extent  of  its  payment,  it — the  company 
— cannot  take  any  action  that  would  adversely  affect  the  in¬ 
terest  of  the  mortgagee ;  in  fact  the  remaining  amount  due 
the  mortgagee  must  first  be  paid  before  the  company  has  the 
right  to  participate  in  the  proceeds  derived  from  the  sale  of 
the  property. 

In  the  adjustment  of  losses  on  property  situate  on  the 
railroad  right  of  way,  the  adjuster  is  frequently  confronted 
with  the  situation  where  a  waiver  of  the  property  owner’s 
rights  with  respect  to  the  liability  of  the  railroad  has  been 


3 


made  in  consideration  of  the  act  of  the  railroad  company 
in  laying  a  spur  track  up  to  and  frequently  upon  the  insured’s 
premises.  Where  the  insured  has  previous  to  the  date  of  the 
policy  signed  an  agreement  relieving  the  railroad  company  of 
all  responsibility  for  loss  caused  by  negligence  or  otherwise 
the  question  arises  whether  the  policy  has  ever  existed  as  a 
valid  contract.  Where  no  change  has  taken  place  during  the 
life  of  the  policy,  it  is  seldom  indeed  that  the  company 
attempts  to  take  advantage  of  the  situation  with  respect  to 
the  adjustment  of  the  loss  with  the  insured.  Where,  how¬ 
ever,  the  insured  has  during  the  life  of  the  policy  signed  an 
agreement  relieving  the  railroad  of  all  responsibility,  thereby 
incidentally  waiving  any  and  all  rights  which  the  company 
may  have,  it  would  seem  that  a  valid  defense  exists  as  to  the 
payment  of  any  loss. 

The  insured,  however,  as  a  rule,  never  considers  the 
effect  of  waiving  his  rights  against  the  railroad  company  as 
concerning  the  fire  insurance  contract. 

Where  the  common  carrier  or  railroad  company  happens 
to  be  the  cause  of  fire  which  damaged  property  in  cars  on  a 
railroad  siding  on  the  insured’s  premises,  where  the  shippers 
had  not  waived  any  of  their  rights,  the  latter  would  unques- 
tionablv  be  able  to  collect  the  full  amount  of  their  loss  from 
the  railroad  company,  or  if  the  insurance  company  had  paid 
the  insured  the  full  amount  of  the  loss,  then  the  doctrine  of 
•subrogation  would  apply  and  the  company  could  in  turn  collect 
the  full  amount  of  the  loss,  which  it  had  paid  to  the  insured, 
from  the  railroad  company. 

Where  it  could  be  proven  that  the  fire  was  due  to 
negligence  on  the  part  of  the  property  owner,  the  railroad 
company  could  unquestionably  succeed  in  collecting  the  loss 
or  damage  to  its  property  on  the  siding,  provided  no  agree¬ 
ment  to  the  contrary  existed.  And  again  the  railroad  com¬ 
pany  could  collect  for  the  loss  or  damage  to  property  on  its 
main  line,  provided  negligence  on  the  part  of  the  property 
owner  could  be  proven. 

A  great  many  recent  forms  presented  to  the  underwriter, 
under  which  some  losses  have  been  sustained,  are  we  notice 
designed  to  cover  the  liability  of  the  property  owner  to  the 
railroad  company  for  cars  of  the  latter  in  the  former’s  pos¬ 
session  or  on  the  former’s  premises. 

The  consequential  loss  and  damage  clause,  when  con¬ 
tained  in  the  policy,  is  simply  an  added  condition  which  places 
the  necessity  upon  the  company  of  recognizing  liability  and 
paying  for  loss  or  damage  sustained  by  the  insured  on  prop¬ 
erty  which  may  not  in  the  slightest  degree  from  a  physical 
standpoint  actually  be  damaged  by  fire  or  water.  To  illustrate, 
the  refrigerating  machinery  of  a  cold  storage  plant  may  be 
situate  in  a  building  some  distance  from  the  storage  ware¬ 
house.  A  fire  in  the  machinery  building  may  put  the  refrig¬ 
erating  apparatus  or  plant  entirely  out  of  business  and  it  may 


4 


be  physically  impossible  to  make  necessary  repairs  within 
sufficient  time  to  save  and  preserve  stock  in  the  warehouse, 
such  as  meats.  It  could  not  be  said,  of  course,  that  the  stock 
of  meats  had  in  the  slightest  degree  been  damaged  by  fire  or 
water,  and  therefore  the  consequential  loss  and  damage  clause 
was  designed  to  cover  this  situation,  and  the  insured  holding 
a  policy  in  which  the  consequential  damage  clause  is  con¬ 
tained  would,  in  the  case  just  cited,  be  able  to  collect  the  en¬ 
tire  loss  or  damage  sustained  on  meats,  whereas  had  there 
been  no  consequential  loss  or  damage  clause  in  the  policy, 
no  loss  could  have  been  collected  by  the  insured  on  meats 
notwithstanding  the  fact  that  the  stock  in  question  had  proven 
to  be  a  total  loss. 

Most  of  the  consequential  loss  and  damage  clauses  con¬ 
tain  a  provision  that  the  insured  shall  use  due  diligence  to 
repair,  or  restore,  the  damaged  or  destroyed  building,  or 
buildings  or  plant,  and  therefore  when  it  could  be  proven 
that  the  insured  had  not  acted  with  due  diligence  in  an  en¬ 
deavor  to  save  and  preserve  the  property  affected,  the  com¬ 
pany  could  naturally  sustain  a  denial  of  liability. 

In  a  large  percentage  of  the  consequential  damage  clauses 
a  further  provision  is  embodied,  that  the  insured  shall  give 
the  company  immediate  notice,  and  the  importance  of  com¬ 
pliance  with  this  provision  can  be  very  readily  understood. 

Bearing  in  mind  that  a  fire  policy  is  intended  to  cover 
only  ALL  direct  loss  and  damage  by  fire,  the  question  fre¬ 
quently  presents  itself  as  to  what  may  constitute  a  direct 
loss  and  damage  by  fire. 

One  of  the  simplest  illustrations  is  with  reference  to  loss 
or  damage  by  explosion,  preceded  of  course  by  a  fire.  The 
overwhelming  trend  of  court  decisions  with  reference  to  this 
feature  is  that  the  company  is  liable  under  the  regular  fire 
policy  for  ALL  loss  or  damage  where  it  can  be  proven  to 
the  satisfaction  of  the  jury  that  the  proximate  cause  was  a 
“hostile”  fire.  On  the  other  hand,  where  the  company  can 
produce  evidence  that  a  “friendly”  fire  preceded  the  explosion, 
the  only  liability  which  may  accrue1  under  the  policy  is  the 
damage  which  may  be  sustained  by  the  ensuing  fire,  that  is 
the  fire  which  may  follow  the  explosion.  It  is,  of  course,  fre¬ 
quently  quite  difficult  to  separate  the  fire  and  explosion 
damage,  though  this  is  a  matter  of  agreement  as  to  amount 
and  is  not  a  question  of  contract. 

By  “proximate”  cause  is  meant  the  nearest  cause.  That 
is,  the  cause  to  which  the  loss  is  most  nearly  related. 

Of  all  forms  of  insurance  at  present  accepted  or  written 
probably  no  form  is  so  little  understood  as  Use  and  Occu¬ 
pancy,  and  it  is  the  adjustment  of  this  type  of  loss  that  gives 
the  present  day  adjuster  the  greatest  amount  of  thought  as 
well  as  hard  work.  Unfortunately  forms  designed  to  cover 
use  and  occupancy  are  by  no  means  uniform,  and  it  is  there¬ 
fore  impossible  to  lay  down  a  set  rule  as  to  the  proper  pro- 


5 


cedure  in  event  of  a  loss  other  than  to  say  that  the  adjuster 
frequently  has  to  secure’  the  real  intent  of  the  parties  at  in¬ 
terest  over  and  above  the  actual  contract. 

Many  features  enter  into  the  adjustment  of  a  use  and 
occupancy  loss  upon  which  even  no  two  competent  adjusters 
agree. 

It  is  true  that  the  ascertainment  of  the  actual  loss  sus¬ 
tained  on  net  profits  of  the  business  does  not  appear  to  be  a 
difficult  problem,  though  where  the  plant  or  concern  sustain¬ 
ing  the  loss  is  a  large  or  complex  one',  I  believe  I  am  safe  in 
saying  that  I  do  not  think  any  two  competent  adjusters  could 
achieve  exactly  the  same  result  in  independently  figuring  on 
the  actual  loss  sustained  of  net  profits,  from  exactly  the  same 
records. 

In  addition  to  the  actual  loss  sustained  of  net  profits  on 
the  business  which  may  be  prevented  by  the  fire,  the  item  of 
fixed  charges  and  expenses  as  must  necessarily  continue 
during  a  total  or  partial  suspension  of  business  is  frequently 
covered,  though  the  determination  of  just  what  may  be  said 
to  constitute  tixed  charges  and  expenses  is  another  problem 
for  the  adjuster. 

The  entire  use  and  occupancy  cover  is  naturally  predicated 
upon  the  item  of  time  required  to  rebuild,  repair  or  replace 
the  property  damaged  or  destroyed,  and  the  item  of  time  in 
this  instance  is,  of  course,  figured  from  the  date  of  the  fire 
and  not  from  the  date  of  the  arrival  of  the  adjuster  nor  of  the 
completion  of  the  adjustment  nor  of  the  payment  of  the  loss. 

A  great  majority  of  use  and  occupancy  forms  embody  a 
provision  limiting  the  liability  of  the  company  to  not  ex¬ 
ceeding  $ .  for  each  business  day  of  such  suspen¬ 

sion,  though  this  is  not  intended  for,  nor  does  it  have  the  effect 
of  a  valued  policy  as  many  brokers  seem  to  feel. 

The  most  essential  fact  for  an  adjuster  to  consider  in  the 
adjustment  of  a  use  and  occupancy  loss  is  that  the  contract 
is  intended  to  indemnify  the  insured  against  actual  loss  sus¬ 
tained  plus  the  item  of  fixed  charges  and  expenses,  if  cov¬ 
ered,  and  bearing  in  mind  the  intent  of  the  cover,  the  only 
proper  method  to  pursue  is,  as  stated,  first  to  ascertain  the 
true  intent  of  the  parties  at  interest  as  concerning  the  item 
of  fixed  charges  and  expenses  and  then  by  a  keen  analysis 
of  the  insured’s  books  and  records  to  ascertain  the  percentage 
of  profit. 

I  personally  know  of  one  loss  coming  under  this  head 
where  the  insured,  upon  being  able  to  realize  the  same,  or 
in  fact  in  that  instance  a  greater  profit,  first  reported  a  loss 
under  his  use  and  occupancy  policy,  but  subsequently  of 
his  own  volition  withdrew  same  as  he  reached  the  conclusion 
that  he  had  sustained  no  loss  coming  under  the  terms  and 
conditions  of  the  contract,  though  of  course  in  that  instance 
the  form  did  not  contain  the  provision  covering  fixed  charges 
and  expenses. 


6 


Many  use  and  occupancy  forms  contain  a  provision  that 
a  certain  previous  stated  period,  varying-  from  six  to  twelve 
months,  shall  be  utilized  in  ascertaining  the  average  profit 
earned,  and  others  are  entirely  silent  on  this  feature. 

The  adjustment  of  use'  and  occupancy  losses  presents 
most  difficult  problems  while  business  conditions  are  unset¬ 
tled  as  at  the  present  time.  To  illustrate,  a  merchant  or 
manufacturer  may  be  able  to  show  an  unusual  profit  for  the 
last  preceding  six  or  twelve  months,  whereas  the  same  con¬ 
cern  may  now  be  doing  business  at  a  loss.  The  use  and  oc¬ 
cupancy  form,  therefore,  must  first  be  analyzed  before  an 
expression  of  opinion  can  be  given  as  to  the  company’s  liabil¬ 
ity.  In  those  instances  where  the  merchant  is  now  doing 
business  at  a  loss,  the  only  collectible  item  under  the  policy 
is  with  reference  to  fixed  charges  and  expenses,  provided  of 
course  the  cover  could  not  be  said  to  be  a  valued  one. 

A  question  several  times  presenting  itself  to  us  is  with 
reference  to  the  inclusion  or  the  properness  of  excluding  the 
cost  of  removing  debris  in  the  event  of  both  a  building  as 
well  as  a  personal  property  loss.  In  the  event  of  a  partial 
loss  on  the  building,  the  item  of  removing  the  burned  or 
damaged  portion  of  the  building  together  with  the  debris  is 
invariably  admitted  as  a  part  of  the  loss.  Where,  however, 
a  total  loss  to  the  building  structure  has  been  sustained  and 
by  chance  the  amount  of  insurance  slightly  exceeds  the 
agreed  sound  value  of  the  building,  then  the  question  arises : 
Is  the  added  cost  of  removing  the  debris  a  collectible  item 
under  the  policy?  There  are  no  court  decisions  on  this  point 
so  far  as  I  know,  and  it  is  hard  for  me  to  believe,  even  taking 
into  consideration  the  trend  of  court  decisions,  which  lean 
toward  the  interest  of  the  insured  rather  than  the  company, 
that  the  latter  would  be  called  upon  to  pay  any  sum  in  excess 
of  the  entire  sound  value  of  the  building.  The  item  of  cost 
of  removing  the  debris  may  be  covered  under  the  policy,  but 
it  should  be  clearly  stated. 

In  the  event  of  loss  of  personal  property,  such  as  a  stock 
of  merchandise  or  any  property  other  than  a  building  struc¬ 
ture,  the  cost  of  removing  the  debris  does  not  so  frequently 
arise,  though  in  one  recent  instance  the  question  was  pro¬ 
pounded  to  us  whether  in  the  event  of  the  company’s  admit¬ 
ting  a  total  loss  to  sound  value,  could  the  insured  insist  upon 
the  payment  of  the  additional  amount  necessary  to  remove  the 
debris — the  amount  of  insurance  being  in  excess  of  the 
agreed  sound  value.  I  believe,  as  stated,  that  the  company’s 
liability  is  limited  by  the  sound  value,  and  I  cannot  conceive 
of  any  situation  which  might  arise  where  the  insurer  could  be 
called  upon  to  pay  exceeding  the  value  at  the  time  of  the  loss, 
provided,  of  course,  the  policy  contained  no  contrary  or  added 
provision.  I  have  heard  some  doubt  expressed  on  the  part 
of  some  adjusters  as  to  the  legal  right  of  the  company  to 
exclude  the  item  of  the  cost  of  removing  the  debris  in  the 


7 


event  of  a  total  loss  on  a  building  structure,  but,  as  stated, 
there  are  no  decisions  on  this  point  of  which  I  have  any  knowl¬ 
edge,  and  I  am  quite  sure  that  no  company  would  be  willing 
to  admit  this  item  other  than  on  a  strictly  compromise  basis. 

The  question  frequently  arises  as  to  the  proper  course 
to  pursue  in  making  a  denial  of  liability  on  behalf  of  the 
company.  The  writer’s  custom,  or  belief,  in  this  respect  is 
that  it  is  not  necessary  to  insert  in  a  letter  denying  liability 
any  cause  or  reason,  but  a  mere  statement,  setting  forth  that 
the  insurance  company  hereby  informs  you  that  it  denies  any 
and  all  liability  as  a  result  of  claim  made  on  account  of  fire 
on  such  and  such  a  date',  should  suffice. 

Where  the  premium  has  been  paid  in  advance  and  the 
policy  is  void  from  issue,  I  believe  the  safest  policy  to  pursue 
is  to  tender  the  full  return  premium  together  with  the  legal 
rate  of  interest  from  the  date  premium  was  received. 
A  majority  of  attorneys  seem  to  feel  that  this  is  unneces¬ 
sary,  though  certainly  no  harm  is  done  and  opposing  counsel 
are  prevented  from  dwelling  upon  the  acceptance  of  and  fail¬ 
ure  to  return  premium. 

In  those  cases  where  the  insured  has  through  some  act 
voided  the  policy  since  the  date  of  issuance,  I  do  not  believe 
it  is  necessary  to  tender  any  return  premium,  for  the  policy 
did  at  time  of  issuance  exist  as  a  valid  contract,  and  it  so 
existed  for  a  period  thereafter,  and  naturally  had  a  loss  oc¬ 
curred  during  such  time  the  company  would  have  been  called 
upon  to  fulfill  its  contract  by  paying  the  proper  amount  due. 

The  co-insurance,  or  reduced  rate  contribution  or  average 
clause,  is  a  provision  added  to  the  policy,  designed  to  force 
the  insured  to  carry  insurance  up  to  a  certain  stated  value, 
and  failing  so  to  do,  the  insured  must  bear  his  proportion 
of  the  loss. 

The  simplest  manner  in  which  the  co-insurance  clause 
can  be  applied  is  by  considering  that  the  insured  will  in  every 
given  case  be  entitled  to  collect  a  certain  fractional  portion 
of  the  loss ;  the  amount  of  insurance  actually  carried  being 
the  numerator  of  the  fraction  and  the  amount  of  insurance 
which  should  have  been  carried  being  the  denominator.  To 
illustrate,  if  a  building  should  be  valued  at  $10,000,  the  insured 
would,  under  the  80%  co-insurance  clause,  be  required  to 
carry  $8,000.  If,  however,  in  the  event  of  a  loss  the  insured 
had  only  provided  for  $6,000  insurance,  then  he  would  be 
able  to  collect  only  6000/8000  or  24  of  any  loss.  Upon 
applying  this  very  simple  formula  it  will  readily  be  seen  that 
when  a  loss  amounts  to  or  exceeds  the  percentage  named  in 
the  co-insurance  clause,  the  insured  will  succeed  in  collecting 
all  insurance,  though  of  course  there  will  be  a  deficit  in  that 
he  will  be  forced  to  stand  the  loss  sustained  over  and  above 
the  amount  of  insurance  up  to,  of  course,  the  true  extent  of 
the  loss. 


« 


k 


Many  adjusters,  and  particularly  beginners,  are  confused 
as  to  the  proper  method  of  applying  the  distribution  average 
clause  together  with  the  co-insurance  clause.  As  stated,  the 
co-insurance  clause  is  designed  to  force  the  insured  to  carry  a 
certain  percentage  of  insurance  to  value,  whereas  the  distribu¬ 
tion  average  clause  is  a  condition  of  the  policy,  which,  when 
added,  distributes  the  insurance  at  the  several  locations  named 
in  the  proportion  that  the  value  of  the  property  covered  at 
each  location  bears  to  the  value  of  all  the  property.  To  illus¬ 
trate,  let  us  consider  a  $100,000  policy,  covering  three  retail 
lumber  yards  designated  as  numbers  1,  2  and  3,  with  the  80% 
co-insurance  clause  applying.  The  fixed  value  of  the  lumber 
stored  at  yard  No.  1  is  $50,000,  the  value  upon  yard  No.  2, 
$50,000,  and  the  value  upon  yard  No.  3,  $100,000.  Under  the 
distribution  average  clause  the  $100,000  insurance  will  be 
apportioned  50000/200000  or  i*  e-  $25,000,  covering  yard 
No.  1  ;  50000/200000  or  %,  i.  e.  $25,000,  on  yard  No.  2,  and 
100000/200000  or  J4,  i.  e.  $50,000,  on  yard  No.  3. 

It  can  be  readily  seen  that  the  insured  is  short  insurance 
at  all  locations,  and  therefore  in  the  event  of  loss  must  bear 
his  ratable  proportion  by  application  of  the  co-insurance 
clause  as  above  explained.  A  rule  which  all  adjusters  should 
remember  is  that  the  distribution  average  clause  must  first 
be  applied  prior  to  operation  of  the  co-insurance  clause. 

The  three-quarter  value  clause  is  a  condition  of  the  policy 
which,  when  added,  is  designed  to  prevent  over  insurance  and 
is,  therefore,  in  direct  contrast  to  the  co-insurance  clause. 

Under  the  three-quarter  value  clause  the  insured  cannot 
under  any  condition,  regardless  of  the  amount  of  insurance 
carried,  succeed  in  collecting  more  than  three-fourths  of  the 
value  of  the  property  covered  at  time  of  any  loss.  This  state¬ 
ment,  however,  must  be  made  with  the  reservation  that  in  cer¬ 
tain  states  the  three-quarter  value  clause  has  by  law  been  made 
inoperative,  and  even  though  it  may  be  inserted  in  the  policy 
by  the  company  without  penalty,  yet  if  the  insured  objects 
it  cannot  be  applied,  and  must,  therefore,  be  ignored  by  a 
company  representative  in  the  adjustment. 

In  several  states  insurance  companies  are’  forced  to  con¬ 
tend  with  what  is  known  as  a  valued  policy  law ;  said  law 
having  reference  only  to  insurance  on  building  structures. 
The  law  as  a  rule  requires  the  insurance  company  to  state 
in  the  policy  the  agreed  value  of  the  building,  and  by  this 
provision  the  company  is  estopped  from  raising  any  question 
as  to  the  stated  value  in  the  event  of  a  loss,  barring,  of  course, 
the  question  of  fraud  which  may  be  utilized  as  a  defense  un¬ 
der  any  contract  and  under  any  condition. 

Unfortunately  the  valued  policy  law  permits  numerous 
abuses,  one  of  which  being  the  impossibility  of  properly 
applying  the  co-insurance  clause  where  the  building  has  in  the 
policy  been  valued  at  a  ridiculously  low  figure.  While  this 
law  is  not  in  any  respect  favorable  to  the  interests  of  the 


11 


9 


company,  and  it  was  never  designed  to  be,  yet  it  has  in  many 
cases  acted  as  a  boomerang.  For  instance,  the  insured  may 
have  deliberately  valued  his  property  at  a  very  low  figure  in 
one  policy,  which  policy  carries  provision  for  other  insur¬ 
ance  and  contains  a  co-insurance  clause,  whereas  it  is  ascer¬ 
tained  at  the  time  of  the  loss  that  the  insured  has  procured 
insurance  greatly  in  excess  of  the  fixed  stated  value.  The 
valued  policy  laws  in  force  at  present  in  several  states  do  not 
permit  the  collection  of  an  amount  exceeding  the  stated  value, 
and  it  is,  therefore,  useless  for  an  insured  to  carry  insurance 
in  excess  of  the  value  as  set  forth  in  the  policy  or  policies. 

A  very  troublesome  situation  which  frequently  arises  is 
with  reference  to  what  may  be  construed  as  double  insurance 
on  improvements  or  betterments  to  a  building  structure.  In 
a  large  percentage  of  the  cases,  barring  an  agreement  to  the 
contrary,  all  improvements  and  betterments  made  upon  or  in 
a  building  structure  by  a  tenant  instantly  become  the  property 
of  the  owner,  and  the  tenant  cannot  remove  the  improvements 
or  betterments  upon  expiration  of  the  lease,  nor  can  he  deface 
the  building  in  an  endeavor  to  place  it  in  the  same  condition 
it  was  in  upon  commencement  of  the  lease. 

The  value  of  improvements  and  betterments  is  predicated 
to  a  large  extent  upon  the  life  of  a  lease,  and  therefore  the 
insurable  interest  of  the  tenant  investing  money  in  improving 
or  bettering  the1  building  is  a  very  clear  and  well-defined  one. 
On  the  other  hand  the  landlord  or  owner  invariably  carries 
building  insurance,  and  it  is  seldom,  when  a  loss  occurs  in 
such  a  building,  that  the  question  does  not  arise  as  to  which 
class  of  insurance  shall  pay  the  loss  and,  if  both,  upon  what 
basis.  The  tenant  carrying  insurance  on  his  improvements 
and  betterments  is  certainly  entitled  to  a  full  measure  of  pro¬ 
tection  and  the  company  covering  the  building  structure 
cannot  sustain  a  denial  of  liability  for  loss  on  improvements 
and  betterments  in  the  event  the  owner  persists  in  making  a 
claim  for  same. 

Most  losses  of  this  type  are  settled  upon  a  compromise 
basis,  that  is  by  an  agreement  between  all  interests.  If.  how¬ 
ever.  it  is  impossible  to  secure'  concurrent  action,  the  only 
method  by  which  duplication  of  payment  of  either  all  or  anv 
part  of  the  loss  can  be  avoided  is  by  actual  repairs  being 
undertaken  by  the  companies  interested,  both  on  the  building 
as  well  as  the  improvement  and  betterment  line,  under  a  side 
agreement,  the  eventual  basis  of  settlement  between  them¬ 
selves  having  previously  been  agreed  upon. 

Probably  one  of  the  most  frequent  situations  which  arises 
in  the  adjustment  of  losses  on  household  furniture  is  with 
reference  to  the  existence  of  a  chattel  mortgage  covering  the 
property  described  either  in  whole  or  in  part.  A  large  per¬ 
centage  of  those  individuals  who  purchase  pianos  or  victrolas, 
do  so  on  the  partial  payment  plan,  and  upon  making  the  first 
payment  a  contract  of  sale  is  invariably  required  by  the 


10 


seller,  which  contract  the  purchaser  usually  signs  without 
reading.  Most  of  these  contracts  are  designed  to  retain  the 
title  in  the  name  of  the  seller  until  the  final  payment  is  made, 
though  I  am  very  much  inclined  to  believe  that  the  legal 
title  would,  in  the  event  of  litigation,  be  proven  to  be  vested 
in  the  purchaser;  the  interest  of  the  seller  being  that  of  a 
mortgagee  or  lienor.  Regardless  of  whether  the  title  could 
be  said  to  be  vested  in  the  purchaser  or  seller,  a  voidance  of 
the  policy  with  respect  to  the  item  involved  could  be  said  to 
exist.  The  policy,  as  you  know,  requires  sole  and  uncon¬ 
ditional  ownership  and  further  provides  that  personal  prop¬ 
erty  covered  shall  not  be  encumbered  by  a  mortgage. 

If,  therefore,  in  presenting  a  claim  upon  the  company,  the 
insured  should  incorporate  in  the  schedule  the  item  which  is 
being  purchased  under  contract,  and  has  not  been  paid  for, 
the  entire  claim  could  be  rejected  by  the  company  and  the 
insured  could  not  succeed  in  collecting  anything  by  a  suit. 
If  on  the  other  hand  the  insured  made  no  claim  upon  the  item 
in  controversy,  the  company  could  not  disclaim  liability  on  the 
remaining  property  which  was  not  covered  under  a  chattel 
mortgage. 

In  several  states  there  are  very  peculiar  laws  with  respect 
to  the  sale  of  real  property  under  contract.  In  Florida,  for 
instance,  the  execution  of  a  contract  of  sale,  where  the  pay¬ 
ment  say  of  only  $1  had  been  made,  vests  the  legal  title  in  the 
purchaser  under  contract ;  the  seller  occupying  merely  the 
position  of  a  mortgagee,  and  a  mortgage  on  real  property 
in  but  very  few  states  affects  the  validity  of  the  policy. 


* 


11 


■■■■ 


Apportionment  of  Losses 

Under 

Nonconcurrent  Policies 


A  LECTURE 


BY 

W.  N.  BAMENT 

General  Adjuster 


[pSj 


THE  HOME  INSURANCE  COMPANY 

NEW  YORK 


' 


I 

-  ’*$8  I  ii  1*1 

I 


1 


. 


Apportionment  of  Losses 
Under  Nonconcurrent  Policies 

By  W.  N.  Bament,  General  Adjuster 
The  Home  Insurance  Company 

This  subject  has  been  one'  of  absorbing-  and  ever  increas¬ 
ing  interest  ever  since  the  contribution  clause  came  into  general 
use  as  a  policy  condition  and  even  before.  It  has  commanded 
the  attention  of  the  courts  as  well  as  that  of  the  best  legal 
and  lay  minds  in  the  fire  insurance  business  for  nearly  a 
century,  and  although  many  rules  have  been  devised  for  the 
apportionment  of  losses  where  policies  are  nonconcurrent,  no 
rule  of  universal  or  even  general  application  has  been  found 
and  the'  prospect  of  discovering  the  philosopher’s  stone  is  as 
remote  as  ever. 

What  is  the  “whole  insurance”  upon  the  property  covered, 
or  on  the  items  damaged,  when  both  specific  and  general 
policies  are  involved?  Shall  the  blanket  policy  contribute 
with  one  specific  policy  and  in  remainder  with  another  and 
so  on  all  down  the  line,  or  shall  it  be  distributed  on  the 
various  classes  in  the  ratio  of  value,  the  ratio  of  loss,  or 
in  some  other  manner?  What  effect  should  the  presence  of 
a  co-insurance  or  average  clause  in  one  or  more  nonconcur¬ 
rent  policies  have  upon  the  apportionment?  No  satisfactory 
answer  to  these  questions  has  ever  been  given. 

All  the  courts  which  have  passed  upon  the  question  have 
held  that  the  first  requisite  of  any  method  of  apportionment 
must  be  the  insured’s  protection  to  the  full  extent  of  his 
rights  under  his  policies  and  any  method,  which  in  a  given 
case  fails  to  afford  him  this  just  measure  of  indemnity,  must 
give  place  to  another  that  will. 

This  is  eminently  proper,  because  other  insurance  is  taken 
out  by  the  insured  for  his  own  benefit  and  not  for  the  benefit 
of  co-insuring  companies.  He  pays  the  premium  and  con¬ 
sequently  it  is  his  interest  which  should  be  the  prime  con¬ 
sideration.  The  benefit  accruing  to  co-insuring  companies  is 
and  should  be  regarded  as  a  piece  of  good  fortune  and  merely 
incidental ;  but  as  each  policy  is  an  independent  contract,  it 
should  be  construed  in  the  light  of  reason  without  doing  vio¬ 
lence  to  any  of  its  provisions. 

Almost  all  of  the  well  known  rules  of  apportionment 
were  devised  long  before  that  evolutionary  product  of  the 
insurance  business — co-insurance — made  its  appearance,  and 
although  some  of  them  served  reasonably  well  in  many 


1 


instances  as  means  to  an  end,  the  question  has  been  so  affected 
by  co-insurance  conditions  that  all  the  olde'r  rules  have  in  a 
large  measure  lost  what  merit  they  possessed  as  practical 
working  propositions. 

As  it  has  seemingly  been  impossible  to  find  any  rule  of 
apportionment  of  general  application,  it  follows  that  it  would 
be  equally  impossible  to  prepare  a  contribution  clause  which 
would  satisfactorily  meet  all  conditions,  hence  the  present 
brief  form,  in  view  of  the  general  inclination  of  the  courts 
to  construe  it  along  reasonable  and  equitable  lines,  is  prob¬ 
ably  as  good  as  can  be  devised,  except  that  possibly  some 
amendment  might  be  made  in  order  to  meet  situations  grow¬ 
ing  out  of  co-insurance  or  reduced  rate  average  clause  con¬ 
ditions. 


Simple  Nonconcurrence 

In  cases  of  simple  nonconcurrence,  the  law  is  apparently 
settled.  Where  there  is  a  loss  on  one  item  only,  the  full 
amount  of  the  blanket  or  general  policy  must  contribute  with 
the  specific  toward  the  payment  of  the  loss.  Page  Bros.  vs. 
Sun  Ins.  Office,  74  Fed.  203,  20  C.  C.  A.  397.  In  that  case 
the  court  used  this  somewhat  striking  sentence,  “This  con¬ 
tract  is  too  plain  to  permit  construction,  too  positive  to  allow 
evasion,  and  too  clear  to  admit  of  doubt.” 

When  there  is  a  loss  on  two  items,  one  of  which  is 
covered  by  a  specific  policy,  and  there  is  also  a  blanket  policy 
covering  both,  the  latter  must  first  pay  the  loss  on  the 
extraneous  item  and  then  contribute  in  remainder  with  the 
specific.  Cromie  vs.  Kentucky  and  Louisville  Ins.  Co.,  15  B. 
Mon.  432  (Ky.  1854). 

To  the  minds  of  some,  both  these  rules  place  too  great 
a  burden  upon  the  blanket  policy,  but  the  argument  of  the 
court  in  the  Page  Bros,  case  (supra)  in  support  of  the  first, 
emphasized  as  it  is  by  the  decision  of  the  Court  of  Appeals 
of  New  York  in  the  case  of  Farmers’  Feed  Company  vs. 
Scottish  Union  &  National  Insurance  Company,  173  N.  Y.  241, 
and  the  Supreme  Court  of  Wisconsin  in  the  case  of  Stephen¬ 
son  vs.  Agricultural  Insurance  Company.  116  Wis.  277,  93 
N.  W.  19,  both  of  which  decisions,  singularly  enough,  were 
rendered  the  same  day,  seems  to  be  unanswerable. 

The  second  rule  has  not  received  universal  endorsement. 
If,  say  its  critics,  it  be  admitted  that  there  must  be  some 
division  of  the  blanket  policy,  the  question  might  easily  arise 
whether  that  division  should  be  made  by  setting  aside  as 
covering  on  the  extraneous  item  an  amount  just  sufficient  to 
pay  the  loss  thereon,  and  apply  the  remainder  to  contribute 
with  the  specific  policy  as  in  the  Cromie  case  (supra),  or 
whether  some  other  division  might  not  or  should  not  be  made. 
This  thought  seems  to  have  been  in  the  mind  of  Chief  Justice 
Marshall,  when  in  the'  Cromie  case,  he  expressed  grave  doubt 


2 


m 


whether,  on  account  of  the  continuing  liability  of  the  blanket 
policy  on  the  undestroyed  property,  and  the  possibility  of 
a  later  loss  thereon,  the  Court  had  not  made  that  policy 
contribute  with  the  specific  for  too  great  an  amount.  If 
he  could  have  anticipated  present-day  co-insurance  conditions, 
he  would,  through  his  seeming  solicitude  for  the  interest  of 
the  insured,  doubtless  have  discovered  another  reason  for 
a  different  subdivision  of  the  blanket  policy,  for  while  the 
Cromie  rule  points  an  absolutely  sure  way  of  giving  the 
insured  the  maximum  indemnity  to  which  he  is  entitled  in 
every  instance  in  the  absence  of  co-insurance,  yet  it  has 
exactly  the  opposite  effect  in  many  cases  when  co-insurance 
conditions  prevail. 

Although  it  is  conceivable  that  the  co-insurance'  neces¬ 
sities  of  the  insured  may  have  some  influence  upon  future 
decisions  in  cases  of  compound  nonconcurrence,  good  argu¬ 
ments  can  be  advanced  against  their  doing  so  in  cases  of. 
simple  nonconcurrence. 

According  to  the  plain  reading  of  the  contribution  clause, 
the  specific  insurer  is  entitled  to  contribution  from  the  full 
face  of  the  general  policy.  The  courts,  however,  declare 
that  full  contribution  will  not  be  accorded  if  there  be'  a  loss 
on  an  extraneous  item,  but  hold  that  the  loss  thereon  must 
first  be  cared  for  by  the  general  policy.  If,  therefore,  the 
specific  insurer  consents  to  a  modification  of  the  clear, 
unambiguous  phraseology  of  the  clause  to  the  extent  of  per¬ 
mitting  the  general  policy  to  first  pay  this  extraneous  loss, 
it  meets  the  situation  fairly,  and  cannot  be  deprived  of  con¬ 
tribution  from  the  remainder,  without  doing  unreasonable 
and  inexcusable  violence  to  the  contribution  provision. 

When  there  is  no  loss  on  any  other  item,  there  is  nothing 
to  deduct  from  the  blanket  policy,  and  the  specific  is  conse¬ 
quently  entitled  to  contribution  from  its  full  face. 

The  Page  Bros,  decision  (supra)  is  so  fundamentally 
sound  as  to  preclude  discussion.  The  Cromie  decision  has 
stood  the  test  for  over  sixty  years  and  its  underlying  prin¬ 
ciple  has  never  been  successfully  assailed  or  seriously  ques¬ 
tioned  ;  hence,  it  is  entitled  to  be  regarded  as  a  fixed  rule, 
universally  applicable  in  cases  of  simple  nonconcurrence1. 

If  these  two  decisions  are  fundamentally  sound  when 
the  policies  do  not  contain  co-insurance  or  reduced  rate 
average  conditions,  they  are  equally  sound  when  such  con¬ 
ditions  are  present.  These  conditions  neither  increase  nor 
diminish  the  amount  of  the  policies  containing  them,  or  in 
any  way  affect  the  “whole  insurance”  on  the  property ;  hence 
they  should  not  be  permitted  to  have  any  influence  whatever 
upon  the  contribution  clause,  so  long  as  it  retains  its  present 
phraseology.  Apportionments  under  them  must,  however, 
always  be  subject  to  the  limit  of  liability  of  all  policies  under 
their  conditions  of  co-insurance  or  average. 


3 


Such  extraordinary  liberties,  however,  have  been  taken 
with  the  contribution  provision  from  the  time  of  its  birth, 
and  it  has  been  disfigured  by  the  experts  and  the  courts  in 
such  a  variety  of  ways,  as  to  leave  one1  in  doubt  whether  there 
is  any  limit  to  which  they  will  not  go  in  that  direction,  in 
order  to  meet  the  necessities  of  the  insured.  But  when  all 
is  said,  it  would  seem  that  the  argument  advanced  by  the 
court  in  the  Farmers’  Feed  Co.  case — that  the  insured  should 
stand  a  portion  of  the  loss  himself  in  a  certain  contingency, 
because  he  virtually  agrees  to  do  so — should  apply  to  cases  of 
simple  nonconcurrence  as  well  as  to  those  where  the  policies 
are  concurrent. 


Compound  Nonconcurrence 

It  is  in  cases  of  compound  or  interlocking  nonconcurrence 
where  two  or  more  subjects  which  are  covered  by  specific 
policies  are  also  embraced  within  the  cover  of  blanket 
^policies,  or  where  they  interlock,  that  the  principal  trouble 
arises. 

Some  adjusters  entertain  the  view  that  in  cases  of  non- 
'Concurrence,  simple  or  compound,  when  it  is  found  that  the 
sum  of  the  co-insurance  or  average  clause  limits  of  the  various 
insurers  is  less  than  the  total  loss,  each  company  should  pay 
the  amount  of  its  limit,  and  that  no  attempt  at  an  apportion¬ 
ment  should  be  made.  And  if  the  sum  of  the  co-insurance  or 
•.average  clause  limits  exceeds  the  total  loss,  as  they  frequently 
do,  there  should  be  deducted  from  each  maximum  limit  its 
pro  rata  proportion  of  the  excess  loss  in  order  to  arrive  at  the 
net  liability  of  each  group  of  policies. 

This  view  is  evidently  based  on  the  following  line  of 
reasoning :  Rates  at  the  present  time  are  quite  generally 
predicated  upon  the  use  of  the  80,  90  or  100  percent  average 
or  co-insurance  clause.  The  insurers,  in  effect  if  not  in  fact, 
say  to  the  insured :  “If  you  will  carry  insurance  to  the  extent 
of  80,  90  or  100  percent  of  the  value  of  the  property,  as  the 
case  may  be,  and  thus  give  us  the  benefit  of  that  contribu¬ 
tion  in  the  event  of  loss,  we  will  be  satisfied,  provided,  of 
course,  you  are  not  overpaid.”  In  cases  of  compound  non¬ 
concurrence  where  all  policies  contain  the  average  or  co- 
insurance  clause,  and  the  same  is  operative  in  all,  where  the 
aggregate  insurance  equals  or  exceeds  the  required  percentage 
of  the  aggregate  value,  the  insured  should  be  entitled  to  collect 
his  loss  up  to,  but  not  exceeding,  the  co-insurance  limit  of 
each.  If  average  or  co-insurance  conditions  are  complied 
with,  the  insured  will  have  done  all  that  was  contemplated 
either  by  himself  or  the  insurers  when  the  policies  were 
issued,  and  each  company  should  be  content  if  the  amount 
apportioned  to  it  does  not  exceed  its  average  or  co-insurance 
limit. 


4 


It  will  be  observed,  however,  that  the  theory  or  rule 
above  outlined  is  virtually  the  same  as  apportioning  the  total 
loss  on  all  items  on  the  basis  of  the  average  or  co-insurance 
limits,  instead  of  the  face  of  the  policies,  and  is  in  direct  con¬ 
flict  with  the  principle  laid  down  in  Farmers’  Feed  Company 
and  Stephenson  cases  (supra).  In  considering  this  ques¬ 
tion,  we  must  take  the  insurance  contract,  not  as  it  might, 
could,  or  should  be,  but  as  it  is ;  and  the  contribution  clause 
therein,  although  it  has  been  distorted  almost  beyond  recog¬ 
nition,  is  entitled  to  at  least  a  rational  construction. 

In  the  case  of  Buse  vs.  National  Ben  Franklin  Insurance' 
Company  et  ah,  161  N.  Y.  Supp.  566  (1916),  the  Supreme 
Court  of  New  York,  Erie  County,  applied  the  above  principle 
in  the  apportionment  of  the  loss.  The  old  New  York  Stand¬ 
ard  Policy  under  which  this  loss  occurred,  lines  98  to  100, 
contains  the  following  stipulation : 

“and  the  extent  of  the  application  of  the  insurance  under  this  policy 
or  of  the  contribution  to  be  made  by  this  company  in  case  of  loss,  may 
be  provided  for  by  agreement  or  condition  written  hereon  or  attached 
or  appended  hereto,” 

and  the  court  evidently  concluded  that  by  reason  of  this  pro¬ 
vision  the  average  clause  superseded  the  contribution  clause 
of  the  policy,  the  latter  clause  being  omitted  from  the  average 
clause.  The  court  also  seems  to  have  ignored  the  decision  in 
the  Farmers’  Feed  Company  case  (supra),  evidently  dis¬ 
tinguishing  the  two  cases  by  reason  of  the  fact  that  in  the 
former  the  policies  were  nonconcurrent,  while  in  the  latter 
they  we're  concurrent.  The  case  was  not  appealed  probably 
on  account  of  the  smallness  of  the  amount  involved,  hence  we 
do  not  know  what  views  the  Court  of  Appeals  may  entertain 
on  the  subject. 

It  should  be  stated  that  the  Farmers’  Feed  Company  case 
is  also  distinguishable  from  the  Buse  case  from  the  fact  that 
in  the  former  a  part  of  the  insurance  did  not  contain  the 
average  or  co-insurance  clause,  whereas  in  the  latter  case  all 
the  insurance  was  subject  to  co-insurance  conditions. 

Many  ingenious  methods  of  apportionment  have  been 
suggested,  among  which  may  be  mentioned  the  Finn- 
Griswold-Kinne  rule,  the  Connecticut  or  Gradual  Reduction 
rule,  the  Reading,  the  Albany,  and  the  Rice  rules,  and  the 
later  inventions,  the  Morristown  and  Giesse  rules  (so  named 
on  account  of  the  modesty  of  their  authors),  all  of  which 
have  been  weighed  in  the  balances  and  found  wanting. 

Each  of  these  rules  has  had  its  strong  advocates  and  also 
its  hostile  critics.  The  number  of  court  decisions  bearing  on 
the  subject  are  comparatively  few,  and  there  is  quite  as  great 
a  diversity  of  opinion  among  the  experts  as  there  is  among 
the  courts  ;  in  fact,  there  has  probably  been  no  court  decision 
rendered  which  did  not  have  its  inception  in  the  mind  of  some 
insurance  adjuster. 


5 


Probably  the  best  and  most  exhaustive  discussion  of  the 
subject  which  has  ever  appeared  is  that  contained  in  a  paper 
read  by  the  late  E.  F.  Rice,  adjuster  of  the  Aetna  Insurance 
Company,  before  the  Underwriters’  Association  of  the  North¬ 
west,  and  published  in  the  proceedings  of  that  organization  in 
1880.  Pie  reviewed  and  carefully  analyzed  all  the  decisions 
and  views  of  text  writers  and  experts  up  to  that  time,  and 
clearly  demonstrated  that  none  of  the  methods  which  had 
been  devised  were  theoretically  sound  or  universally  applic¬ 
able.  He  showed  by  concrete  examples  that  under  the  then 
known  rules  of  apportionment,  which  made  a  division  of  the 
blanket  policy,  if  the  amount  of  gross  loss  were  increased, 
the  liability  of  the  blanket  policy  might  be  diminished,  and  he 
rightly  argued  that  any  rule  which  would  admit  of  a  really 
bright  adjuster  increasing  his  company’s  salvage  by  magnify¬ 
ing  the  loss  must  be  fallacious  in  principle.  Mr.  Rice  invented 
an  ingenious  rule  of  his  own,  to  which  reference  will  be 
made  later,  and  evidently  thought  he  had  at  last  found  some¬ 
thing  which  would  withstand  the  criticism  which  he  had 
directed  against  the  older  theories,  but  alas,  Mr.  Rice’s  own 
rule  succumbed  to  the  same  test.  The  Kinne  rule  had  not  at 
that  time  made  its  appearance,  but  being  an  offspring  of  the 
Finn  rule,  it  cannot  withstand  the  test  applied  by  Mr.  Rice  any 
better  than  the  others. 

The  Reading  Rule 

This,  briefly  stated,  provides  for  a  division  of  the  blanket 
policy  among  the  various  items  of  property  in  the  ratio  of 
values,  for  purposes  of  contribution. 

This  rule  was  used  by  the  Supreme  Judicial  Court  of 
Massachusetts  in  1858  in  the  case  of  Blake  vs.  Exchange 
Mutual  Insurance'  Company,  12  Gray  265,  and  again  by  the 
same  court  in  1913  in  the  case  of  Taber  vs.  Continental  Insur¬ 
ance  Co.  et  ah,  Vol.  42,  Insurance  Law  Journal,  page  516, 
213  Mass.  487.  The  same  principle  was  also  applied  by  the 
courts  in  New  York  and  Vermont,  Ogden  vs.  East  Rivet 
Insurance  Company,  2  Insurance  Law  Journal  135,  50  N.  Y. 
388 ;  Chandler  vs.  Insurance  Company  of  North  America, 
70  Vt.  562,  41  Atl.  502.  This  rule  will  often  fully  reimburse 
the  insured  and  do  no  real  violence  to  the  interest  of  any 
insurer,  yet  it  will  in  many  instances  fail  to  give  full  indem¬ 
nity,  and  unless  modified  by  making  the  division  only  among 
the  items  involved  in  the  loss,  will  work  quite  an  injustice 
to  the  specific  insurers. 

The  point  most  frequently  urged  against  it,  is  that  it 
imports  into  the  blanket  policy  the  average  distribution  clause, 
a  condition  which  is  foreign  to  it,  thereby  giving  it  a  more 
favorable  construction  than  it  deserves,  but  a  similar  objec¬ 
tion  can  be  urged  with  equal  propriety  against  all  of  the  other 
rules  which  call  for  a  division  of  the  blanket  policy,  and  if 
the  division  be  made  only  among  the  items  involved  in  the 


6 


loss,  in  the  ratio  of  value',  there  would  seem  to  be  no  logical 
reason  why  this  method  should  be  subjected  to  any  greater 
criticism  than  the  others. 

This  rule  has  had  the  endorsement  of  the  courts  of  last 
resort,  to  which  reference  has  been  made  (supra),  but  in  the 
cases  decided  the  interests  of  the  insured  were  not  adversely 
affected  by  its  application.  If  conditions  had  been  otherwise 
we  can  easily  believe  that  the  principle  of  the  rule  would 
have  been  rejected  by  these  courts  just  as  it  has  been  by  others. 

The  Modified  Reading  Rule 

This  rule  divides  the  blanket  policies  among  all  classes  of 
property,  whether  involved  in  the  loss  or  not,  so  that  when 
possible,  and  as  nearly  as  possible  the  percentage  of  available 
insurance  to  value  will  be  the  same  on  each  class  as  the 
percentage  of  total  insurance  to  total  value  of  all  classes. 

This  differs  from  the  original  Reading  rule  in  that  it 
takes  into  consideration  both  value  and  insurance,  and  the 
relation  of  one  to  the  other.  Although  it  is  not  universally 
applicable,  it  will  work  reasonably  well  in  a  large  number 
of  cases  when  co-insurance  conditions  prevail. 

The  Albany  Rule 

This  much  criticized  and  many  times  rejected  rule,  which 
was  inserted  as  a  condition  in  some  policies  fifty  years  ago, 
provides  that  if  the  insured  shall  have  other  insurance  which 
includes  the  premises  or  property  described,  and  such  policy 
or  policies  shall  at  any  time  or  under  any  circumstances  or 
contingency  be  liable  to  the  insured  for  any  amount  what¬ 
ever,  such  policy  or  policies,  as  between  the  insured  and  the 
company,  shall  be  considered  as  contributing  insurance. 

This  condition  was  adopted  because  of  the  decision  of 
the  Court  of  Appeals  of  New  York  in  the  case  of  Howard 
vs.  Scribner,  in  1843,  5  Hill  298,  wherein  it  was  held  that 
where  there  is  both  specific  and  blanket  insurance  the  latter  /n 
does  not  constitute  “other  insurance”  and  that  the  specific  I L 
policy  must  pay  in  full  without  regard  to  the  blanket  policy. 

But  this  decision  was  overruled  in  1872  in  the  case  of  Ogden 
vs.  East  River  Insurance  Company  (supra).  Strange  as  it 
may  seem  this  antiquated  doctrine  still  obtains  in  Pennsyl¬ 
vania,  Meigs  vs.  Insurance  Company  of  North  America,  205 
Pa.  St.  378,  54  Atl.  1053.  The  Federal  Court  held  to  a 
contrary  doctrine  in  another  case  (the  Hill  school  case) 
growing  out  of  the  same  fire,  Meigs  vs.  London  Assurance 
Company,  126  Fed.  781. 

The  Pennsylvania  Court  has  certainly  turned  the  tables 
on  those  who  are  imbued  with  the  idea  that  no  rule  of 
apportionment  is  too  good  for  the  insured  and  the  specific 
insurers,  and  none  too  harsh  for  the  blanket  policy.  It 
swings  the  pendulum  too  far  in  the  opposite  direction,  carries 
the  doctrine  of  the  conservation  of  the  blanket  policy  beyond 

7 


all  reason,  and  entirely  ignores  the  contribution  clause  in 
the  specific  policies.  The  Pennsylvania  Court  had  rendered  a 
similar  decision  in  the  case  of  Sloat  vs.  Royal  Insurance 
Company,  49  Pa.  St.  14,  in  1865,  and  its  adherence  to  the 
same  doctrine  fifty  years  later  indicates  that  the  Court  is 
still  joined  to  its  idols.  The  position  of  the  Pennsylvania 
Court  is  unsound,  and  it  is  not  at  all  surprising  that  its 
opinion  is  never  followed  by  other  states  and  is  ignored 
in  practice  within  its  own  borders. 

The  Albany  rule  very  frequently  entails  a  loss  upon  the 
insured  and  does  a  flagrant  injustice  to  the  blanket  policy. 
It  has  been  in  harmless  disuse  for  many  years,  and  no  one 
in  these  days  gives  it  serious  consideration. 

The  courts,  however,  in  the  Farmers’  Feed  Company 
and  Stephenson  cases  (supra)  when  construing  the  words 
“whole  insurance”  held  that  the  amount  of  insurance  is  the 
largest  sum  that  the  company  in  any  circumstances,  accord¬ 
ing  to  the  terms  of  the  policy,  can  be  required  to  pay  and 
not  the  smaller  sum  which  can  be  collected  under  special 
conditions,  and  according  to  these  decisions  the  loss  which 
accrues  to  the  insured  by  reason  of  the  co-insurance  or  re¬ 
duced  rate  average  clause  in  certain  policies  must  be  borne 
by  him  and  cannot  be  transferred  to  the  companies  whose 
policies  are  otherwise  concurrent  but  have  no  such  clause. 

Although  the  language  used  in  these  decisions  is  ex¬ 
ceedingly  broad,  and  notwithstanding  the  fact  that  both 
courts  permitted  the  insured  to  suffer  a  loss  under  special 
conditions  in  the  face  of  the  fact  that  they  carried  full  in¬ 
surance,  it  is  hardly  to  be  supposed  that  they  would  stand 
for  the  principle  of  the  Albany  rule  in  a  case  of  either  simple 
or  compound  nonconcurrence,  but  would  on  the  contrary 
follow  precedents  and  permit  some  equitable  division  of 
the  blanket  policy,  for  purposes  of  apportionment. 

Gradual  Reduction  Rule 

This  rule  is  one  of  the  most  popular  among  adjusters, 
particularly  in  the  Middle  West  where  it  has  been  in  use  for 
many  years,  and  it  has  less  to  commend  it  than  any  other 
with  the  possible  exception  of  the  Albany  rule.  It  is  un¬ 
sound  in  principle,  is  always  inequitable  in  its  results,  and 
possesses  but  one  virtue  and  that  is,  in  the  absence  of  co- 
insurance  conditions,  it  will  more  frequently  indemnify  the 
insured,  unless  reapportionment  is  resorted  to,  than  any  other. 
But  this  virtue  is  largely  neutralized  by  the  injustice  it  al¬ 
ways  does  to  the  blanket  insurers,  and  by  its  inevitable  dis¬ 
crimination  against  certain  specific  insurers  when  their  poli¬ 
cies  cover  on  different  items.  And  if  the  blanket  policy 
contains  the  reduced  rate  average  clause,  as  it  usually  does, 
the  rule  will  in  many  instances  have  just  the  opposite  effect 
from  that  intended,  for  the  liability  of:  the  blanket  policy 


will  be  limited  by  the  operation  of  the  average  clause,  and 
the  extra  burden  imposed  upon  it  by  the  rule  will  be  trans¬ 
ferred  to  the  insured. 

The  Gradual  Reduction  rule  was  adopted  by  the  Su¬ 
preme  Court  of  Errors  of  Connecticut  in  the  case  of  Schmaelzle 
vs.  London  and  Lancashire  Fire  Insurance  Company  et  al., 
75  Conn.  397,  53  Atl.  863,  60  L.  R.  A.  536,  96  Am.  St.  Rep.  233, 
and  more  recently  by  the  New  Jersey  Court  of  Errors  and 
Appeals  in  Grollimund  vs.  Germania  Insurance  Company, 
83  Atl.  1108.  It  was  urged  by  the  company  having  the 
specific  policy  in  the  recent  Massachusetts  case  previously 
referred  to,  but  was  rejected  by  the  court.  Taber  vs.  Con¬ 
tinental  Insurance  Company,  213  Mass.  487,  42  Insurance 
Law  Journal  516  (supra). 

It  makes  the  blanket  policy  contribute  first  for  its  full 
amount  on  the  item  where  the  loss  is  greatest,  then  in  remain¬ 
der  where  next  greatest,  etc.,  thereby,  in  all  instances  mag¬ 
nifying  the  contributing  power  of  said  policy,  and  in  many 
instances  transforming  it  as  a  factor  in  contribution  into  a 
policy  several  times  its  original  amount.  Why  the  impo¬ 
sition  should  start  with  the  greatest  loss  instead  of  the  next 
greatest  or  smallest  is  not  manifest ;  in  fact  the  Connecticut 
Court  in  the  Schmaelzle  case  frankly  admitted  that  the  start¬ 
ing  point  was  purely  arbitrary  and  intimated  that  the  order 
of  reduction  might  be  determined  by  the  highly  intellectual 
and  logical  process  of  drawing  lots.  The  ends  of  justice 
would  probably  have  been  served  quite  as  well  if  the  entire  ap¬ 
portionment  had  been  made  in  that  way. 

The  Schmaelzle  case  has  its  ludicrous  side.  So  absorbed 
were  all  the  parties  in  the  question  of  apportionment,  that 
the  fact  that  the  blanket  policy  contained  a  co-insurance 
clause  and  that  its  maximum  liability  was  absolutely  fixed 
thereby  was  entirely  overlooked.  If  this  had  been  discovered, 
we  would  doubtless  have  had  from  the  Court,  instead  of  an 
argument  in  favor  of  the  continuing  gradual  reduction  of  the 
blanket  policy,  a  learned  dissertation  in  favor  of  its  con¬ 
servation. 

In  the  Schmaelzle  case  all  the  blanket  policies  were  con¬ 
current  and  all  specific  policies  were  concurrent.  In  the 
Grollimund  case  the  specific  insurances  were  in  the  same 
company,  so  that  these  are  not  ideal  cases  with  which  to 
illustrate  the'  absurdity  of  the  “gradual  reduction”  principle 
as  a  practical  working  proposition.  Let  us  take  for  example : 
$10,000  specific  insurance  in  Company  “A”  on  building, 
$10,000  specific  insurance  in  Company  “B”  on  machinery, 
and  $10,000  blanket  insurance  in  Company  “C”  on  building 
and  machinery.  Sound  value  of  building  $15,000  and  loss 
$10,000.  Sound  value  of  machinery  $15,000  and  loss  $9,999. 
No  co-insurance  conditions.  Applying  the  Gradual  Reduc¬ 
tion  rule  commencing  with  the  larger  loss,  Company  “A” 


9 


pays  10,000/20,000  of  $10,000  on  building,  or  $5,000;  Com¬ 
pany  “B”  pays  10,000/15,000  of  $9,999  on  machinery,  or 
$6,666,  and  Company  “C”  pays  $8,333. 

Conceding,  of  course,  that  the  insured  should  be  fully 
indemnified,  and  even  conceding  for  the  moment  that  the 
blanket  policy  should  be  penalized,  what  possible  excuse 
can  be  given  for  making  Company  “B”  with  a  policy  cov¬ 
ering  for  the  same  amount  on  an  item  with  the  same  sound 
value  and  a  smaller  loss,  pay  $1,666  more  than  Company  “A”? 
Why  this  extraordinary  discrimination  in  favor  of  Company 
“A”  ? 

This  apportionment,  which  is  self-evidently  arbitrary, 
does  a  three-fold  injustice:  First,  to  Company  “B”  which 
is  made  to  pay  a  sum  unconscionably  out  of  proportion  to 
that  paid  by  Company  “A” ;  second,  to  Company  “C”  in  that 
it  is  treated  as  if  it  were  a  policy  for  $15,000  instead  of  what 
it  really  is,  one  for  $10,000;  third,  to  the  insured  by  reason 
of  the  fact  that  his  best  insurance  (the  blanket)  is  unwar¬ 
rantably  depleted,  and  solely  in  the  interest  of  one  of  the 
specific  insurers. 

If  the  100  percent  reduced  rate  average  clause  be  in¬ 
serted  in  the  blanket  policy  and  the  Gradual  Reduction  rule 
be  applied,  Company  “A”  pays  $5,000,  Company  “B,”  $6,666, 
Company  “C,”  $6,666.33  and  the  insured  loses  $1,6 66.67. 

This  apportionment,  if  possible,  is  even  worse  than  the 
other,  for  the  discrimination  against  Company  “B”  still  re¬ 
mains  and  the  burden  which,  in  the  absence  of  the  average 
clause  is  saddled  on  to  the  blanket  policy,  is  transferred  to 
the  insured  who  loses  $1,666.67  in  the  face  of  the  fact  that  he 
is  fully  insured. 

It  is  argued  by  the  advocates  of  the  rule  that  if  two  or 
more  independent  fires  occur,  no  matter  how  short  the  in¬ 
tervening  time,  the  blanket  policy  will  be  gradually  reduced 
by  the  first  and  by  each  succeeding  fire,  and  in  the  payment 
of  this  series  of  losses  its  basis  of  contribution  will  in  the 
aggregate  exceed  its  face  just  as  it  does  through  the  opera¬ 
tion  of  the  Gradual  Reduction  rule.  That  is  quite  true,  but 
one  loss  is'  not  two  or  more  losses,  and  the  amount  of  the 
blanket  policy  at  the  time  of  “any  loss”  is  no  more  than  its 
face.  And  there  is  no  more  warrant  for  magnifying  it  beyond 
that  amount  for  purposes  of  contribution,  than  for  loss  pay¬ 
ing  purposes,  and  the  latter  is  of  course  impossible. 

The  blanket  insurer  might  easily  be  reconciled  to  having 
its  policy  gradually  reduced  and  its  contribution  regulated 
by  the  course  of  events  in  the  shape  of  a  second  or  third 
fire  which  may  never  occur,  but  that  is  vastly  different  from 
having  it  gradually  reduced  and  thereby  greatly  magnified  as 
a  contributing  factor,  by  an  arbitrary  act  in  every  single 
loss.  The  specific  insurers  might  also  cheerfully  accept  the 


10 


results  accruing  from  the  order  of  events,  whereas  they  might 
justly  resent  the  discrimination  which  inevitably  attends  the 
operation  of  the  Gradual  Reduction  rule. 

If  three  items  are  involved  in  a  loss,  six  different  com¬ 
binations  or  orders  of  reduction  are  possible;  if  four  items 
are  involved  twenty-four  combinations  are  possible,  and  if 
five  items,  one  hundred  and  twenty  combinations,  etc.  Each 
one  of  these  orders  of  reduction  will  produce  a  different  re¬ 
sult  and  neither  is  entitled  to  precedence  over  any  other. 

The  rule  always  works  an  injustice  to  one  interest,  gen¬ 
erally  to  two  interests,  sometimes  to  three  interests ;  and 
any  scheme  of  apportionment  against  which  these  indictments 
can  be  proven  is  indefensible. 

The  Finn-Griswold-Kinne  Rule 

The  Finn  rule  which  was  first  applied  by  its  author  in 
1842  is  substantially  as  follows  :  The  contributive  liability 
of  the  compound  policy  shall  be  based  upon  the  loss  (in¬ 
stead  of  the  value  as  in  the  Reading  rule)  in  the  proportion 
that  the  loss  upon  the  specific  property  shall  bear  to  the  loss 
upon  all  of  the  property  covered  by  the  general  insurance. 

This  rule  which  failed  to  fully  indemnify  the  insured  in 
many  instances,  was  modified  by  Griswold  and  still  further 
modified  by  Col.  Kinne  in  the  rule  which  bears  his  name, 
which  is  the  latest  and  probably  the  final  development  of  the 
loss  to  loss  principle.  It  possesses  the  merit  of  being  con¬ 
sistent  with  itself  in  that  it  is  made  applicable  to  cases  of 
simple  as  well  as  compound  nonconcurrence.  Its  first  ap¬ 
plication  sometimes  fails  to  give  the  insured  full  indemnity, 
which  necessitates  a  reapportionment,  and  sometimes,  though 
seldom,  a  second  reapportionment.  The  idea  of  reapportion¬ 
ment  is  repugnant  to  many,  and  to  the  minds  of  some  there 
is  a  serious  fracture  of  the  loss  to  loss  principle  the  moment 
this  becomes  necessary.  The  rule,  in  the  absence  of  co- 
insurance  conditions,  through  its  provisions  for  reapportion¬ 
ment,  will  always  give  the  insured  the  fullest  indemnity  to 
which  he  is  entitled,  but  the  Reading  rule  or  any  other  rule 
will  do  the  same  if  unlimited  reapportionment  is  resorted  to. 

In  point  of  popularity  among  adjusters  the  Kinne  rule 
will  take  rank  with  the  Gradual  Reduction  rule.  It  has 
been  in  use  on  the  Pacific  Coast  for  over  thirty  years  and  in 
1910  the  Fire  Underwriters’  Association  of  the  Pacific  adopted 
it  for  general  use  among  the  companies  in  that  territory,  and 
by  some  members  of  the  fraternity  there  and  elsewhere  it 
is  regarded  as  the  last  word  on  the  subject  of  nonconcurrent 
apportionments,  as  is  evidenced  by  the  following  quotation 
from  a  recent  address  delivered  by  a  prominent  adjuster, 
“There  is  only  one  equitable  rule,  that  is  the  Kinne  rule, 
loss  to  loss,  with  reapportionment  from  excess  to  pay  short¬ 
ages.” 


11 


The  basis  for  this  somewhat  extravagant  eulogy  is  not 
apparent.  As  a  matter  of  fact  the  rule  is  simply  one  of 
several  convenient  makeshifts,  none  of  which  can  lay  claim 
to  theoretical  soundness  any  more  than  they  can  to  general 
applicability.  In  addition  to  the  criticism  directed  against 
its  underlying  principle  by  Mr.  Rice,  the  Kinne  rule  will  not 
only  fail  to  fully  indemnify  the  insured  in  many  instances 
when  co-insurance  is  present,  but  will  come  about  as  far 
from  doing  so  as  almost  any  other  known  rule,  hence  under 
present  day  underwriting  conditions,  it  fails  in  the  one  point 
which  of  all  others  is  chiefly  instrumental  in  bringing  it  into 
being. 

Some  who  favor  the  Kinne  rule  in  preference  to  the  Read¬ 
ing  rule  do  so  on  the  ground  that  the  latter  is  too  favorable 
to  the  blanket  policy,  evidently  overlooking  the  fact  that 
sometimes  the  reverse  is  true,  and  not  infrequently  the  Kinne 
rule  penalizes  it  less  than  the  Reading  rule. 

The  Modified  Finn  Rule 

As  the  modified  Reading  rule  is  sometimes  used  when 
co-insurance  conditions  are  present,  so  the  modified  Finn 
rule  is  occasionally  used  when  those  conditions  are  absent. 
It  divides  the  blanket  policy  among  the  various  classes  of 
property  so  that  when  possible,  and  as  nearly  as  possible, 
the  ratio  of  available  insurance  to  loss  will  be  the  same  on 
each  class  as  the  total  insurance  is  to  the  total  loss  on  all 
classes. 

The  difference  between  the  modified  and  the  original 
Finn  rules  is  similar  to  the  difference  between  the  modified 
and  the  original  Reading  rules ;  it  takes  into  consideration 
both  loss  and  insurance,  and  the  relation  of  one  to  the  other. 

There  is  of  course  no  authority  in  the  policy  for  such 
arbitrary  divisions  and  they  could  not  stand  if  they  resulted 
in  reducing  payment  to  insured. 

The  Rice  Rule 

According  to  Mr.  Rice’s  rule,  if  the  aggregate  loss  is  less 
than  the  aggregate  insurance,  and  the  loss  upon  each  subject 
covered  by  the  specific  insurance  is  less  than  the  specific  in¬ 
surance  plus  the  whole  insurance  available  to  pay  the  loss, 
there  is  contribution,  as  between  the  specific  and  collective 
policies,  and  every  policy  should  enjoy  a  proportional  abate¬ 
ment  of  liability.  And  the  loss,  if  any,  for  which  the  general 
policy  alone  is  liable,  having  been  provided  for,  the  insur¬ 
ance  remaining  under  that  policy  should  be  apportioned  for 
contributive  purposes  among  the  various  subjects  in  the  pro¬ 
portion  that  the  maximum  overinsurance  on  each  bears  to 
the  aggregate  overinsurance  on  all  collectively. 


12 


By  maximum  overinsurance  on  each  item  is  meant  the 
excess  of  insurance  over  and  above  the  loss  on  each  item 
ascertained  by  adding  the  full  face  of  the  blanket  policy  to 
each  of  the  specific  policies.  The  Rice  rule  virtually  makes 
an  apportionment  of  the  salvage  in  the  ratio  of  the  over¬ 
insurance.  It  is  ingenious  but,  as  has  been  pointed  out,  it 
is  open  to  the  same  objection  that  Mr.  Rice  directed  against 
the  older  well-known  rules,  that  is,  if  the  total  loss  be  in¬ 
creased,  the  payment  of  some  insurer  may  be  diminished. 


The  Giesse  Rule 

This  rule  takes  its  name  from  the  case  in  which  it  was 
first  applied  and  is  quoted  verbatim: 

“First  find  the  limit  of  liability  of  each  class  of  insurance  under 
the  average  or  co-insurance  clause,  and  find  the  total  of  those  limits 
(which  will  usually  be  somewhat  greater  than  the  aggregate  loss)  by 
adding  them  together ;  then  find  what  each  class  would  pay  if  it  got 
the  full  benefit  of  its  contribution  clause,  i.  e.,  contribution  from  the 
face  or  full  amount  of  all  other  insurance  covering  the  whole  or  any 
part  of  the  property  which  itself  covers,  and  find  the  total  of  these 
amounts  (which  of  course  will  be  less  than  the  aggregate  loss)  by 
adding  them  together.  We  thus  find  the  most  each  class  can  be 
made  to  pay,  and  also  the  least  it  can  possibly  get  off  for.  Add  the 
several  differences  between  these  pairs  of  limits,  find  what  proportion 
of  that  total  the  aggregate  excess  of  the  upper  limits  over  the  aggre¬ 
gate  loss  constitutes,  and  deduct  that  proportion  of  each  of  the  dif¬ 
ferences  from  the  respective  upper  limits,  to  find  what  each  class  of 
insurance  shall  pay  to  make  up  the  loss.” 

This  rule  was  devised  for  use  under  reduced  rate  aver¬ 
age  or  co-insurance  conditions,  and  is  of  course  not  univer¬ 
sally  applicable.  A  great  deal  of  ingenuity  was  displayed 
in  its  preparation,  but  as  the  basis  upon  which  the  lower 
limits  are  fixed  is  unsatisfactory,  it  follows  that  the  result 
must  be  equally  so  in  many  instances. 

The  Morristown  Rule 

This  rule  is  so  named  because  of  the  fact  that  it  was 
while  adjusting  a  loss  at  Morristown,  New  Jersey,  that  the 
author  received  his  inspiration. 

The  basis  of  this  rule  is  the  same  as  the  lower  limits, 
as  fixed  by  the  Giesse  rule,  the  aggregate  of  which  will  be 
less  than  the  loss.  The  deficiency  is  distributed  among  the 
various  policies  pro  rata  until  each  reaches  its  co-insurance 
or  other  limit  of  liability.  Inasmuch  as  the  basis  is  the  same, 
it  is  subject  to  the  same  criticism  as  the  Giesse  rule.  Fur¬ 
thermore,  if  in  attempting  to  take  care'  of  the  deficiency  in 
the  manner  prescribed,  the  co-insurance  limits  of  certain 
policies  are  reached,  and  a  portion  of  the  loss  still  remains 
unpaid,  no  arrangement  is  made  for  taking  care  of  the  deficit, 
and  hence  the  rule  frequently  fails  to  fully  indemnify  the 
insured. 


Conclusion 

That  the  foregoing  observations  are  mainly  critical  rather 
than  constructive  is  due  to  the  fact  that  virtually  every  con¬ 
ceivable  phase  of  the  question  has  been  considered  by  the 
brightest  minds  that  the  business  has  produced,  and  although 
they  have  not  led  us  out  of  the  wilderness  into  the  promised 
land,  the  methods  suggested  by  them  have  been  utilized  in 
solving  all  the  intricate  questions  in  apportionment  that  have 
arisen  up  to  the  present  time,  and  too  much  credit  cannot  be 
accorded  to  them  for  the  study  they  have  given,  and  for  the 
efforts  they  have  put  forth  in  the  attempt  to  perform  the 
seemingly  impossible  task  of  finding  a  rule  of  universal  ap¬ 
plication. 

The  question  still  confronts  us ;  most  of  the  rules  possess 
some  merit  as  means  to  an  end,  but  the  experts  and  the  courts 
have  never  agreed  upon  a  uniform  and  clearly  defined  method 
of  apportionment — and  probably  never  will — and  as  all  of 
those  in  use  are  arbitrary,  that  rule  should  be  applied  to 
each  specific  case  which  will  come  nearest  to'  doing  sub¬ 
stantial  justice  to  the  respective  insurers,  and  at  the  same 
time  give  the  insured  the  fullest  indemnity  to  which  he  is 
entitled  under  the  most  generous  interpretation,  within  reason, 
of  the  various  contracts. 

Judge  Ostrander,  in  his  well-known  work  on  insurance, 
says :  “Cases  are  sometimes  presented  where  the  complica¬ 
tions  defy  human  understanding.  When  this  occurs — when 
reason  is  baffled  and  mathematics  fail — arbitrary  action  be¬ 
comes  a  necessity.  The  knot  we  cannot  untie  must  be  cut.” 


14 


Writs  of  Attachment 
and  Other  Liens 


BY 

W  .  N.  BAMENT 

General  Adjuster 


THE  HOME  INSURANCE  COMPANY 

NEW  YORK 


Writs  of  Attachment  and 
Other  Liens 


* 


Of  all  the  matters  connected  with  claims  arising  under 
policies  of  insurance,  perhaps  the  most  vexatious  are  liens 
and  restraining  orders  which  are  known  by  various  names 
such  as  warrants  of  attachment,  writs  of  garnishment  and 
trustee  writs,  the  practical  effect  of  which  is  to  tie  up  the 
insurance  fund  and  virtually  make  the  garnishee  a  stake¬ 
holder  or  custodian  of  the  defendant’s  property  in  his  hands. 
And  if  there  is  any  more  highly  favored  party  under  the 
laws  of  this  country  (with  the  possible  exception  of  a  mort¬ 
gagee  under  the  mortgagee  clause  of  a  fire  insurance  policy) 
than  an  attaching  creditor,  he  has  not  yet  been  discovered. 

Insurance  companies  are  not  infrequently  served  with 
notices  from  attorneys  stating  that  their  clients  have  liens 
against  any  insurance  money  which  may  be  due  parties  to 
whom  they  have  sold  goods  and  requesting,  and  sometimes 
demanding,  that  no  payment  be  made  without  recognizing  the 
interest  of  their  clients.  These  so-called  liens  have  no  legal 
significance,  but  insurance  companies  are  exceedingly  con¬ 
servative  in  the  matter  of  loss  payments  and  usually  insist 
upon  all  liens,  whether  valid  or  not,  being  dismissed  before 
making  payment. 

If  a  notice  is  received  from  a  bailor  who  happens  to 
have  goods  in  the  possession  of  a  bailee,  whose  insurance 
policies  cover  “for  account  of  whom  it  may  concern,”  or 
contain  the  unrestricted  “trust  and  commission  clause,” 
stating  that  he  claims  an  interest  in  the  insurance  taken  out 
by  the  bailee,  it  will  be  necessary  for  such  notice  to  be 
respected,  because,  under  policies  so  phrased  the  bailor 
might,  under  circumstances  similar  to  those  in  the  cases 
hereinafter  cited,  have  a  direct  right  of  action  against  the 
bailee’s  insurers.  Utica  Canning  Co.  vs.  Home  Ins.  Co.,  132 
App.  Div.  420,  38  Ins.  Law  Journal  813;  Johnson  vs.  Abresch, 
123  Wis.  130,  101  N.  W.  *395.  Czerweny  vs.  Ins.  Co.,  139 
N.  Y.  Supp.  345. 

Liens  are  sometimes  filed  by  public  adjusters  and  if  the 
copy  of  the  contract,  which  usually  accompanies  such  notices, 
is  so  phrased  as  to  constitute  an  assignment  of  a  certain  per¬ 
centage  of  the  adjusted  loss,  these  liens  cannot  safely  be 
ignored,  but  if  the  contract  is  not  tantamount  to  an  assign¬ 
ment,  it  is  of  no  binding  effect.  Several  years  ago  a  prom- 


1 


inent  company  served  notice  upon  public  adjusters,  great 
and  small,  that  they  must  cease  serving  them  with  such  liens, 
and  that  if  persisted  in  they  need  not  expect  to  collect  any 
of  their  losses  until  the  expiration  of  sixty  days  from  filing- 
proofs.  The  practical  effect  of  this  action  was  to  put  a  stop 
to  the  persistent  filing  of  liens  by  public  adjusters.  This  rule, 
however,  is  not  as  inflexible  as  the  laws  of  the  Medes  and 
Persians  and  has  been  waived  in  exceptional  cases  where 
unscrupulous  claimants  have  deliberately  attempted  to  evade 
liability  to  a  public  adjuster  under  a  meritorious  lien,  when  { 

the  latter  has  been  instrumental  in  securing  a  fair  adjust¬ 
ment. 

There  is  no  uniformity  in  the  laws  of  the  various  states 
with  respect  to  the  matter  of  garnishment,  either  statutory 
or  judicial,  but  the  attitude  of  the  State  of  New  York  on  this 
question  is  very  forcibly  set  forth  in  the  case  of  Douglas  vs. 

Phenix  Ins.  Co.  of  Brooklyn,  138  N.  Y.  209,  from  which 
the  following  extracts  in  abbreviated  form  are  taken : 

“The  right  of  a  creditor  of  a  corporation  to  prosecute  an  action 
to  recover  the  debt  in  the  courts  of  his  own  state  cannot  be  defeated 
by  the  pendency  of  attachment  proceedings  against  him  in  another 
state  by  a  creditor  there,  when  the  only  claim  of  jurisdiction  by  the 
foreign  courts  rests  upon  authority  given  by  the  statutes  of  its  state 
to  seize  the  debt  by  and  through  process  proceedings  against  an  agent 
of  the  corporation  in  that  state. 

In  attachment  proceedings  the  res  must  be  within  the  jurisdic¬ 
tion  of  the  court  issuing  the  process,  in  order  to  confer  jurisdiction. 

A  domestic  corporation  has  at  all  times  its  exclusive  residence 
and  domicile  in  the  jurisdiction  of  origin,  and  it  cannot  be  garnished 
in  another  jurisdiction  for  debts  owing  by  it  to  home  creditors,  so 
as  to  make  the  attachment  effectual  against  such  a  creditor  in  the 
absence  of  jurisdiction  acquired  over  his  person. 

The  law  of  a  state  cannot  make  a  debtor,  who  is  actually  a 
non-resident,  a  resident,  by  so  declaring,  at  least  so  as  to  bind 
another  jurisdiction  by  the  declaration. 

The  legal  proceedings  or  judgments  of  another  state  are  rec¬ 
ognized  here  only  where  jurisdiction  has  been  acquired  according 
to  the  course  of  the  common  law  in  the  foreign  forum ;  and  this 
although  the  statutes  of  that  state  purport  to  give  its  courts  jurisdic¬ 
tion,  in  disregard  of  the  principles  and  rules  of  general  jurisprudence, 
which  this  state  is  bound  to  recognize. 

In  an  action  upon  a  policy  of  insurance  issued  by  defendant,  a 
domestic  corporation,  it  pleaded  in  abatement,  in  substance,  that  it 
was  carrying  on  business,  and  maintained  an  agency  in  the  state  of 
Massachusetts ;  that  pursuant  to  the  laws  of  that  state,  it  has  ap¬ 
pointed  an  attorney  therein,  upon  whom  process  can  be  served;  that 
prior  to  the  commencement  of  this  action,  an  action  was  brought  by  V 

creditors  of  the  plaintiff,  residing  in  that  state,  against  him,  in  which 
action  defendant  was  made  a  party  defendant  as  trustee  of  the  plain¬ 
tiff  therein;  *  *  *  and  by  virtue  of  the  attachment  the  sheriff 
levied  on  the  debt  due  plaintiff  from  defendant  upon  said  policy, 

that  said  action  is  still  pending,  and  that  by  virtue  of  the  laws  of 

said  state,  its  courts  acquired  full  jurisdiction  of  the  parties  and 
control  over  the  fund;  that  defendant  had  notice  of  all  the  proceed¬ 
ings  in  said  action,  ‘and  was  duly  served  with  process  therein.’  Held 

that  a  demurrer  to  this  plea  was  properly  sustained;  that  defendant 

was  in  no  just  or  legal  sense  a  resident  of  Massachusetts,  had  no 


2 


domicile  there  and  was  not  the  agent  of  plaintiff;  and  that,  in  con¬ 
templation  of  law  the  company  and  the  debtor  were,  at  the  time  of 
the  issuing  of  the  attachment,  in  this  state,  and  not  in  Massachu¬ 
setts.” 


1'he  court  further  held  : 

“We  deem  it  unnecessary  to  consider  the  position  of  the  defend¬ 
ant.  If  it  may  be  subjected  to  embarrassment  or  even  to  a  double 
judgment,  it  will  be  in  consequence  of  its  own  act  in  voluntarily 
subjecting  itself  to  the  laws  of  Massachusetts.” 

Whatever  view  may  be  entertained  as  to  the  soundness 
of  ruling-  of  the  New  York  Court  of  Appeals,  that  a  statutory 
assumption  of  jurisdiction  by  another  state  is  subject  to  col¬ 
lateral  attack  whenever  *my  deviation  from  the  common  law 
shall  have  occurred,  especially  if  not  in  consonance  with  its 
own  statutory  laws,  yet  if  the  Supreme  Judicial  Court  of 
Massachusetts  were  to  compel  payment  to  an  attaching  cred¬ 
itor  in  that  state,  in  keeping  with  the  statutory  laws  of  that 
Commonwealth,  and  the  courts  of  New  York  were  to  decide 
that  the  loss  must  be  paid  a  second  time  to  a  claimant  in 
that  state,  it  would  certainly  seem  directly  in  conflict  with 
the  full  faith  and  credit  clause  of  the  Constitution  of  the 
United  States  as  indicated  in  the  cases  hereinafter  cited. 

Article  4,  Section  I.  of  the  Constitution  of  the  United 
States,  reads  as  follows : 

“Full  faith  and  credit  shall  he  given  in  each  State  of  the  public 
acts,  records,  and  judicial  proceedings  of  every  other  State.  And  the 
Congress  may  by  general  laws  prescribe  the  manner  in  which  such 
acts,  records  and  proceedings  shall  be  proved,  and  the  effect  thereof.” 

Two  decisions  of  absorbing  interest  have  been  rendered 
by  our  highest  tribunal  by  reason  of  this  provision  of  the 
Constitution,  which  bear  directly  on  the  subject  of  the  juris¬ 
diction  of  states  in  garnishment  proceedings.  The  first  of 
these,  which  is  reported  in  198  U.  S.  205,  that  of  Harris 
vs.  Balk,  is  familiar  to  all  law  students.  The  caption  of  the 
decision,  which  was  rendered  by  Mr.  Justice  Peekham  in  1905 
reads  as  follows : 

“(1)  The  judgment  of  a  state  court,  if  that  court  has  jurisdiction  to 
render  it,  is  entitled  to  the  same  faith  and  credit  in  the  courts 
of  another  state  that  it  is  in  the  state  where  rendered  as  a 
valid  domestic  judgment. 

(2)  The  temporary  presence  of  the  garnishee  within  the  state  gives 
a  court  of  that  state  jurisdiction  to  render  judgment  against 
him  in  garnishment  proceedings  upon  personal  service  within 
the  state,  if  during  such  temporary  presence  in  the  state,  the 
principal  debtor  could  have  sued  him  there  to  recover  the  debt, 
and  the  laws  of  the  state  permit  the  garnishment  of  a  principal 
debtor. 

(3)  The  consent  of  a  garnishee  to  a  judgment  impounding  his  debt 
to  the  principal  debtor  does  not  make  the  payment  under  the 
judgment  voluntary,  where  he  was  absolutely  without  defense, 
so  as  to  prevent  him  from  pleading  such  payment  in  bar  to 
an  action  on  the  debt. 


3 


(4)  The  duty  of  the  garnishee  to  give  notice  of  the  garnishment 
to  the  principal  debtor  is  discharged  by  pleading  the  judgment 
therein  in  bar  to  an  action  on  the  debt  while  there  remained 
nearly  a  year  in  which  the  principal  debtor  might  litigate  the 
question  of  his  liability  in  the  court  which  rendered  the  judg¬ 
ment.” 

Harris,  a  resident  of  North  Carolina,  was  indebted  to 
Balk,  also  a  resident  of  North  Carolina,  in  the  sum  of  $180 
for  money  borrowed  under  a  verbal  promise  to  pay,  but  there 
was  no  written  evidence  of  the  obligation.  Jacob  Epstein,  y 

of  Baltimore,  asserted  that  Balk  was  indebted  to  him  in  the 
sum  of  $300.  Harris  visited  Baltimore  for  the  purpose  of 
purchasing  merchandise  and  while  there  was  served  with  a 
foreign  or  non-resident  writ  of  attachment  against  Balk,  at¬ 
taching  the  debt  due  Balk  from  Harris.  Before  the  return 
day  of  the  attachment  writ,  Harris  left  Baltimore  and  returned 
to  his  home  in  North  Carolina.  He  did  not  contest  the  garn¬ 
ishment,  and  August  11th,  1896  made  affidavit  that  the 
amount  had  been  attached  by  Epstein  of  Baltimore,  and  by 
his  counsel  in  the  Maryland  proceedings,  Harris  consented 
therein  to  an  order  of  condemnation  against  him  as  garnishee 
for  $180,  the  amount  of  his  debt  to  Balk.  Afterward  Harris 
paid  the  amount  of  judgment  to  one  Warren,  attorney  for 
Epstein,  residing  in  North  Carolina. 

On  the  11th  day  of  August,  1896  Balk  commenced  suit 
against  Harris  before  a  justice  of  the  peace  in  North  Carolina, 
to  recover  the  $180.  Harris  pleaded  in  bar  the  recovery  of 
the  Maryland  judgment  and  his  payment  thereof  and  con¬ 
tended  that  it  was  conclusive  because  the  judgment  was  valid 
in  Maryland  and  entitled  to  full  faith  and  credit  in  the  courts 
of  North  Carolina.  Judgment  was  rendered  against  Harris, 
which  judgment  was  affirmed  by  the  Supreme  Court  of  North 
Carolina.  The  ground  of  such  judgment  was  that  the  Mary¬ 
land  court  obtained  no  jurisdiction  to  attach  or  garnishee  the 
debt  due  from  Harris  to  Balk,  because  Harris  was  but  tem¬ 
porarily  in  the  state  and  the  situs  of  the  debt  was  in  North 
Carolina.  The  United  States  Supreme  Court  in  commenting 
on  this  case  used  the  following  language : 

“It  ought  to  be  and  it  is  the  object  of  the  courts  to  prevent  the 
payment  of  any  debt  twice  over.  Thus — Harris,  owing  a  debt  to  Balk 
paid  it  under  a  valid  judgment  against  him  to  Epstein.  He  certainly 
ought  not  to  be  compelled  to  pay  it  a  second  time,  but  should  have 
the  right  to  plead  his  payment  under  the  Maryland  judgment.  It  is  4 

objected,  however,  that  payment  by  Harris  to  Epstein  was  not  a  legal 
compulsion.  Harris  in  truth  owed  the  debt  to  Balk  which  was  at¬ 
tached  by  Epstein.  He  had,  therefore,  as  we  have  seen,  no  defense 
to  set  up  against  the  attachment  of  the  debt.  Jurisdiction  over  him 
personally  had  been  obtained  by  the  Maryland  court.  As  he  was 
absolutely  without  defense  there  was  no  reason  why  he  should  not 
consent  to  a  judgment  impounding  the  debt,  which  judgment  the 
plaintiff  was  legally  entitled  to  and  which  he  could  not  prevent.  There 
was  no  merely  voluntary  payment  within  the  meaning  of  that  phrase 
as  applicable  here. 


4 


But  most  rights  may  be  lost  by  negligence  and  if  the  garnishee 
were  guilty  of  negligence  in  the  attachment  proceedings,  to  the  damage 
of  Balk,  he  ought  not  to  be  permitted  to  set  up  the  judgment  as  a 
defense.  Thus  it  is  recognized  as  the  duty  of  the  garnishee  to  give 
notice  to  his  own  creditor,  if  he  would  protect  himself,  so  that  the 
creditor  may  have  an  opportunity  to  defend  himself  against  the  claim 
of  the  person  suing  out  the  attachment.  While  the  want  of  notification 
by  the  garnishee  to  his  own  creditor  may  have  no  effect  upon  the 
validity  of  the  judgment  against  the  garnishee  (the  proper  publication 
being  made  by  the  plaintiff)  we  think  it  has  and  ought  to  have  an 
effect  upon  the  right  of  the  garnishee  to  avail  himself  of  the  prior 
judgment  and  his  pajunent  thereunder.  The  notification  by  the  garn¬ 
ishee  is  for  the  purpose  of  making  sure  that  his  creditor  shall  have 
an  opportunity  to  defend  the  claim  made  against  him  in  the  attach¬ 
ment  suit.  Fair  dealing  requires  this  at  the  hands  of  the  garnishee. 
Balk  had  notice  of  the  proceedings  in  Maryland,  but  took  no  action. 

Generally  though,  the  failure  on  the  part  of  the  garnishee  to 
give  proper  notice  to  his  creditor  of  the  levying  of  the  attachment 
would  be  such  a  neglect  of  duty  on  the  part  of  the  garnishee,  which 
he  owed  to  his  creditor,  as  would  prevent  his  availing  himself  of 
the  judgment  in  the  attachment  suit,  as  a  bar  to  his  creditor  against 
him,  which  might  therefore,  result  in  his  being  called  upon  to  pay 
the  debt  twice.” 

This  litigation  over  a  $180  debt  came  before  the  Supreme 
Court  of  North  Carolina  on  several  occasions.  It  lasted  from 
1896  to  1905  and  after  nine  years  was  reversed  and  remanded 
by  the  Supreme  Court  of  the  United  States. 

This  decision  has  been  quite  severely  criticized  by  a 
prominent  professor  of  law  who  declares  it  to  be  unjust  and 
unsound.  He  thinks  that  Epstein  should  not  have  been  per¬ 
mitted  to  attach  the  debt  due  from  Harris  to  Balk  until  he 
had  first  secured  a  judgment  against  Balk,  and  this  certainly 
seems  reasonable  at  least  to  a  layman.  Let  us  analyze  the 
situation.  A,  a  citizen  of  California,  is  indebted  to  B,  also  a 
citizen  of  California,  in  the  sum  of  $500.  A  happens  to  be  in 
the  state  of  Maine  and  is  served  with  a  writ  of  attachment  by 
C,  who  claims  that  B  is  indebted  to  him  in  the  sum  of  $500. 
A  notifies  B  that  such  writ  has  been  served  upon  him.  C  has 
secured  no  judgment  against  B  and  C’s  claim  is  unjust,  but  B 
must  go  to  the  trouble  of  defending  this  action  in  Maine, 
3000  miles  distant,  and  in  order  to  properly  protect  his  interest 
he  might  be  under  the  necessity  of  traveling  all  this  distance 
and  appearing  at  the  trial,  and  it  is  self  evident  that  it  might 
be  better  for  him  to  lose  the  $500  than  to  incur  the  expense 
which  would  be  incurred  in  an  attempt  to  save  it. 

There  is  another  United  States  Supreme  Court  decision 
somewhat  analogous  to  that  of  Harris  vs.  Balk  (supra)  re¬ 
corded  in  240  U.  ,S.  620,  which  is  entitled  “Baltimore  and 
Ohio  Railroad  Company  against  Hostetter.”  Hostetter,  the 
defendant,  a  resident  of  West  Virginia,  sued  in  a  Justice’s 
Court  in  that  state  for  wages  due  him  by  the  railroad  com¬ 
pany.  The  defense  was  that  the  wages  had  been  paid  by 
the  railroad  company  as  the  result  of  a  garnishment  pro¬ 
ceeding  taken  against  it  in  Virginia  where  it  was  suable  to 


5 


enforce  a  judgment  rendered  in  Virginia  against  Hostetter 
when  he  resided  in  that  state  and  after  a  domiciliary  service 
on  him. 

The  West  Virginia  court  held  that  the  garnishment  pro¬ 
ceeding  was  not  entitled  to  be  enforced  against  Hostetter 
under  the  full  faith  and  credit  clause  of  the  Constitution  of 
the  United  States  because  he  was  not  served  with  process  in 
such  proceedings,  he  then  residing  in  West  Virginia,  although 
extra  judicial  notice  was  given  him  by  the  railroad  company. 

The  plaintiff  in  July,  1911  resided  in  Clifton  Forge, 
Virginia,  and  was  indebted  to  one  Wagner  in  the  sum  of  $35, 
for  which  debt  Wagner  obtained  a  judgment  against  him  in 
a  Justice’s  Court  in  Virginia  based  on  a  summons  served 
“on  said  plaintiff  -----  by  delivering  a  copy  thereof 
to  the  wife  of  the  plaintiff  at  his  usual  place  of  abode.”  Said 
record  further  shows  that  on  the  17th  day  of  September,  1912, 
a  garnishee  summons  was  directed  against  the  Baltimore  & 
Ohio  Railroad  Company ;  that  on  the  third  day  of  October, 
1912,  judgment  was  rendered  against  Hostetter  and  the  Bal¬ 
timore  &  Ohio  Railroad  in  favor  of  Wagner  for  $38.40  and 
interest.  In  these  garnishment  proceedings  no  notice  or  pro¬ 
cess  of  any  kind  was  served  on  Hostetter  who  then  resided 
in  West  Virginia.  But  on  February  14th,  1913,  after  an  appeal 
had  been  taken  by  the  Railroad  Company  in  the  garnishment 
proceedings,  it  notified  Hostetter  in  writing  of  the  pendency 
of  the  garnishment  proceedings  on  appeal.  It  was  not  con¬ 
tended  that  any  formal  notice  was  given  to  Hostetter  of  the 
garnishment  proceedings  for  the  reason  that  the  statute  of 
Virginia  does  not  require  notice  to  be  given  to  a  non-resident 
of  that  state  of  pending  garnishment  proceedings. 

The  United  States  Supreme  Court  overruled  the  courts 
of  West  Virginia  and  held  that  the  Baltimore  &  Ohio  Rail¬ 
road  Company  could  not  be  compelled  to  pay  the  second  time 
the  sum  it  had  discharged  under  the  Virginia  judgment,  citing 
the  following  cases : 

C.  R.  I.  &  P.  R.  R.  Co.  vs.  Sturm,  174  U.  S.  710. 

Harris  vs.  Balk,  198  U.  S.  215. 

L.  &  N.  R.  R.  Co.  vs.  Deer,  200  U.  S.  176. 

It  will  be  observed  that  in  this  case  a  judgment  had 
been  rendered  against  Hostetter  in  favor  of  Wagner,  thereby 
distinguishing  it  from  the  case  of  Harris  vs.  Balk  (supra) 
and  this  would  seem  to  meet  the  point  raised  by  the  law 
professor  above  referred  to  against  the  former  decision,  al¬ 
though  even  if  no  judgment  had  been  rendered,  the  Supreme 
Court  would  no  doubt  have  stood  by  its  decision  in  the  Harris 
vs.  Balk  case.  And  thus  a  case  great  in  principle,  but  involv¬ 
ing  only  $35.00  in  amount,  engrossed  the  attention  of  the 
greatest  tribunal  in  the  world. 

There  is  a  case  pending  at  the  present  time  where  the 
loss  occurred  in  Oklahoma  and  the  claim  was  garnished  by 
a  large  packing  company  in  Chicago,  whose  claim  amounted 


6 


to  more  than  the  total  loss.  Later,  garnishment  proceedings 
were  brought  by  a  resident  creditor  in  Oklahoma.  The  rep¬ 
resentative  of  the  company  in  Chicago  inadvisedly  admitted 
that  it  was  justly  indebted  to  the  insured  for  the  amount  of 
the  loss  as  adjusted,  whereupon  judgment  was  rendered  in 
favor  of  the  attaching  creditor  in  that  state.  This  fact  was 
set  up  in  the  Oklahoma  proceedings,  but  the  attaching  cred¬ 
itor  in  that  state  is  persistent  in  his  efforts  to  secure  the 
insurance  fund.  The  matter  has  been  in  litigation  for  a  year 
or  more  and  is  still  pending. 

The  practice  of  attorneys  with  respect  to  the  matter  of 
making  answer  in  garnishment  proceedings  seems  to  differ, 
but  it  is  submitted  that  the  custom  which  prevails  in  the 
East,  of  making*  non-committal  answers  irrespective  of 
whether  or  not  the  loss  has  been  adjusted,  is  the  better 
practice ;  in  fact,  it  can  truthfully  be  said  that  the  Company 
has  no  money  belonging  to  the  insured  until  the  claim  has 
matured,  that  is,  sixty  days  after  the  receipt  of  satisfactory 
proofs  of  loss,  and  the  New  York  Court  of  Appeals  has  so 
held  (Douglas  vs.  Phenix  Insurance  Company,  supra). 

There  would  seem  to  be  no  reason  why  the  garnishee 
cannot  with  perfect  propriety  make  answer  in  garnishment 
proceedings,  by  saying  that  it  has  not  yet  determined  whether 
or  not  it  has  any  liability  even  though  the  loss  may  have 
been  adjusted  and  the  claim  may  have  matured,  for  until 
payment  has  actually  been  made  there  is  a  possibility  of 
some  development  which  will  afford  a  valid  defense  under 
the  policy. 

If  this  position  were  taken,  or  liability  denied  in  the 
garnishment  proceedings,  it  would  be  incumbent  upon  the 
attaching  creditor  to  affirmatively  prove  that  the  company 
had  a  liability  to  the  insured,  and  in  many  instances  the 
expense  of  proving  this  would  be  in  excess  of  the  creditor’s 
claim.  If,  on  the  other  hand,  as  has  not  infrequently  been 
done  in  some  sections,  the  Company  passively  admits  liability, 
judgment  can  be  taken  and  the  pathway  to  the  Company’s 
exchequer  made  exceedingly  easy  to  the  attaching  creditor. 

In  some  jurisdictions,  under  certain  circumstances,  the 
court  makes  the  garnishee  a  small  allowance  for  expenses  in 
filing  answer  to  the  garnishment  proceedings,  especially  when 
the  attachment  does  not  lie,  but  as  a  rule  insurance  companies, 
under  the  laws  as  they  exist,  are  under  the  necessity  of  in¬ 
curring  all  the  expense  incidental  to  making  answer,  and  if 
there  are  a  number  of  garnishments  against  the  claim,  this 
expense  amounts  to  no  inconsiderable  sum,  and  this  is  par¬ 
ticularly  true  when  garnishments  are  fded  against  the  com¬ 
pany  in  two  or  more  jurisdictions. 

Writs  of  attachment  are  positively  a  source  of  trouble 
and  expense  to  insurance  companies  at  all  times ;  they  are 
comparatively  so  when  the  loss  is  in  one  state  and  the 


7 


garnishment  in  another,  and  they  are  superlatively  so  when 
two  or  more  garnishments  are  pending  in  different  states. 
It  is  said  that  companies  have  been  compelled  to  pay  losses 
twice  under  these  latter  conditions,  but  it  would  seem  that 
if  properly  handled,  this  could  have  been  avoided  by  invoking 
the  full  faith  and  credit  clause  of  the  Federal  Constitution, 
which  was  certainly  intended  to  prevent  such  a  result. 

In  New  York  it  is  made  the  duty  of  a  person  or  cor¬ 
poration  upon  whom  or  which  a  notice  is  served,  to  furnish 
a  certificate  to  the  sheriff  showing  the  nature,  amount,  and 
description  of  the  interest  of  the  defendent  in  any  property 
or  debt  in  the  hands  of  such  person  or  corporation.  Any  one 
under  this  duty,  who  refuses  to  perform  it  may  be  ordered 
before  a  court  or  judge  for  examination. 

The  certificate  furnished  is  evidence  against  the  person 
or  corporation  making  it,  but  it  is  open  to  explanation  in 
case  of  mistake.  It  is  customary,  therefore,  to  be  quite 
non-committal  in  making  answer  to  these  proceedings,  simply 
saying  that  a  policy  has  been  issued  to  the  defendant  cover¬ 
ing  certain  property ;  that  a  loss  has  been  reported,  but  that 
the  company  has  not  determined  its  liability,  if  any,  in  the 
premises.  When  this  is  done  the  insured  should  be  notified 
of  the  fact  that  the  claim  has  been  attached  and  then  await 
developments.  This  mode  of  procedure  usually  results  in 
the  settlement  of  the  claim  and  a  dismissal  of  the  proceedings. 

When  making  answer  to  a  writ  of  attachment,  if  any 
writs  have  been  previously  served,  or  if  the  claim  has  been 
assigned,  or  if  the  loss  under  the  policy  is  made  payable  to 
a  third  party,  these  facts  should  be  fully  set  forth.  An 
'  assignment  may  be  subject  to  attack  on  the  ground  of  fraud, 
and  it  will  not  be  safe  to  pay  the  assignee  of  a  claim  unless 
the  attachment  proceedings  are  dismissed.  The  claim  of  a 
named  payee  under  the  policy,  however,  takes  precedence 
over  that  of  an  attaching  creditor,  or  of  a  trustee  or  assignee 
in  bankruptcy,  and  he  will  have  no  difficulty  in  enforcing 
payment.  Ordinarily  when  the  attention  of  an  attaching  cred¬ 
itor  is  called  to  the  fact  that  the  loss  is  payable  to  a  third 
party,  whose  interest  exceeds  the  amount  of  the  loss,  he 
will  dismiss  the  proceedings.  When,  however,  there  are 
numerous  claimants  to  the  fund  it  frequently  becomes  ad¬ 
visable  to  pay  the  money  into  court,  provided  all  claims  are 
within  the  same  jurisdiction. 

A  circumstance  frequently  affecting  the  validity  of  legal 
liens  such  as  garnishments,  is  the  bankruptcy  of  the  insured. 
Section  67  of  the  Federal  Bankruptcy  Act  provides  that  such 
liens,  except  under  circumstances  which  are  not  material  in 
this  discussion,  will  be  dissolved  by  the  adjudication  in  bank¬ 
ruptcy  provided  (a)  that  the  lien  was  obtained  within  four 
months  prior  to  the  filing  of  the  petition  in  bankruptcy  and 
(b)  that  the  bankrupt  was  in  fact  insolvent  at  the  time  when 


8 


the  lien  was  obtained.  If  the  lien  was  procured  more  than 
four  months  prior  to  the  filing  of  the  petition  in  bankruptcy 
or  if  the  bankrupt  was  still  solvent  at  the  time  when  it  was 
obtained,  the  lien  continues  in  effect. 

In  normal  times  every  large  fire  insurance  company  is 
liable  to  be  served  with  several  writs  of  attachment  each 
month,  but  during  the  period  of  deflation  which  has  been  in 
process  for  the  past  year  there  has  been  a  veritable  avalanche 
of  garnishments  and  liens  filed  against  insurance  companies, 
and  it  is  not  at  all  unusual  for  a  company  to  receive  a  single 
telegram  containing  notice  of  three  or  four  garnishments,  and 
in  a  case  recently  settled  in  Kentucky  twelve  writs  of  attach¬ 
ment  had  been  filed  against  the  claim. 

It  will  be  seen  from  the  foregoing  analysis  that  the  laws 
are  highly  favorable  to  the  attaching  creditor ;  that  they  are 
correspondingly  unfavorable  to  the  debtor  and  still  more  un¬ 
favorable  to  the  garnishee,  who  is  invariably  subjected  to 
more  or  less  trouble,  and  not  infrequently  to  considerable 
expense,  wholly  in  the  interest  of  the  attaching  creditor.  There 
should  be  some  provision  made  for  reimbursing  the  garnishee, 
at  least  for  actual  expenses  incurred  in  connection  with  the 
garnishment  proceedings. 

Years  ago  it  was  the  practice  of  virtually  all  insurance 
companies  to  issue,  or  have  their  field  representatives  issue, 
sight  drafts  in  payment  of  losses  reading  “Pay  to  the  order 

of . ”.  But  largely  on  account  of  the  difficulties 

connected  with  garnishments  and  the  element  of  doubt  as 
to  what  constituted  payment  under  this  form  of  draft  many 
companies  now  issue  only  “Acceptance  Drafts”  reading 

“Upon  acceptance  pay  to  the  order  of . ” 

If,  therefore,  the  company  receives  notice  before  the  draft 
is  accepted  that  the  claim  has  been  garnished,  acceptance,  or 
payment  can  very  properly  be  refused. 

When  a  garnishee  summons  or  a  similar  document  is 
served  upon  a  local  agent  he  should  promptly  telegraph  the 
company,  giving  sufficient  details  to  enable  it  to  identify  the 
loss,  and  should  forward  the  summons  by  first  mail.  He 
should  also  notify  the  general  or  state  agent  having  juris¬ 
diction  in  order  that  the  matter  may  receive  prompt  attention. 


9 


